JOURNAL OF BUSINESS MANAGEMENT VOLUME 19

ISSN 1691-5348

Indexed in EBSCO, Copernicus

JOURNAL OF BUSINESS MANAGEMENT VOLUME 19

Journal of Business Management, Volume 19, 2021

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The Editorial Board

Head of the Editorial Board

Dr. Tatjana Vasiljeva, RISEBA University of Applied Sciences, Latvia

Editors

Dr. Bella Butler, Curtin University, Australia

Dr. Andrejs Cirjevskis, RISEBA University of Applied Sciences, Latvia

Dr. Ole Gjolberg, University of Life Sciences, Norway

Dr. Ulla Hytti, University of Turku, Finland

Dr. Daiga Kamerade-Hanta, University of Salford, Great Britain

Dr. Inna Kozlinska, University of Groningen, Netherlands

Dr. Tonis Mets, University of Tartu, Estonia

Dr. Drahomira Pavelkova, Tomas Bata University of Zlin, Czech Republic

Dr. Sean Patrick Sassmannshausen, Regensburg University of Applied Sciences, Germany

Dr. Arnis Sauka, Stockholm School of Economics in Riga, Latvia

Dr. Irina Sennikova, RISEBA University of Applied Sciences, Latvia

Dr. Marina Solesvik, Western Norway University of Applied Sciences, Norway

Dr. Tatjana Volkova, BA School of Business and Finance, Latvia

Production Editor Dr. Vulfs Kozlinskis

Technical Editor Mg. Anna Strazda

Language Consultant Dr. Benjamin Breggin


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Foreword

In 2020, a wide range of papers was received. All the papers were double-blind peer

reviewed. Following the necessary corrections and additions resulting from the review

process, six accepted papers were included in the issue.

For instance, the authors of the paper “Work, profit and dignity: Towards an integrative

HRM paradigm” analysed two existing paradigms in human resource management. The

authors’ conception that “an integrative model of management, including social theory of

labour, is needed” could be the starting point of integrity research. Interesting conclusions

were made about the tendencies of development of a new paradigm in connection with the

pandemic.

A topic of growing importance was addressed in the paper “In search of high-performance

workplace factors among SMEs”. Creation of high-performance workplaces in SMEs

could be a means of economic recovery after the pandemic.

To protect academic integrity and prevent ethical issues, all submissions were

automatically screened by the software Ouriginal (combined expertise of Urkund and

PlagScan’s plagiarism detection solution).

The Journal of Business Management has been indexed in COPERNICUS since 2017 and

in EBSCO since 2008.

Tatjana Vasiljeva

Prof, Dr. oec.

Chief Editor


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All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or

transmitted in any form or by any means, electronic, mechanical, photocopying, recording or

otherwise, without the prior written permission of the publisher.

Contents

Work, profit and dignity: Towards an integrative HRM paradigm

BARBARA MAZUR, MARTA MAZUR-MALEK ........................................................... 5

In search of high-performance workplace factors among SMEs

JANIS GERCANS ............................................................................................................. 20

Role of informal institutions in the relationship between social capital and

international entrepreneurial entry

MUHAMMAD UMER SHAHID ..................................................................................... 39

The challenges of cybersecurity insurance development: The case of Latvia

TATJANA VOLKOVA, LINDA JEKABSONE, ZITA LAVRINOVICA,

ELINA SABA, MARIS SABA ......................................................................................... 61

Financial sector reform (2016-2019): The impact on Latvian banks

JEKATERINA SNEIDERE, IVARS GODMANIS .......................................................... 80

An analysis of factors affecting the performance of supplier SMEs

JANIS GERCANS, SANDIS BABRIS ........................................................................... 100

Authors ............................................................................................................................ 124

Editorial Affiliation Details ............................................................................................. 128


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Received: 26 July 2020

Accepted for publishing: 6 January 2021

DOI: 10.32025/JBM19001

Work, profit and dignity: Towards an

integrative HRM paradigm

BARBARA MAZUR

MARTA MAZUR-MALEK

ABSTRACT

Purpose. The main purpose of this article is to present two opposing paradigms of management –

economic and humanistic – and to indicate the sources and consequences of their dissimilarities.

Methodology. This article is conceptual in nature. It is based on a literature review. During the

research, a comparative analysis was carried out to sort out the differences in the definitions of

labour in economics and sociology.

Findings. Economics and sociology have different understanding of labour. This difference is

significant and gives birth to two opposing paradigms of HRM management. The dominant

paradigm is the economic one, which does not take into account the humanistic nature of man.

Therefore, an integrative model of management, including social theory of labour, is needed.

Research limitation and directions for future research. The article presents work in its historical

aspect. It does not show how the pandemic contributes to the concept of work and changes it.

Investigating whether remote work is the next step in the evolution of the concept of work might

indicate the direction of future research.

Practical implications. The integrative approach ensures employees the achievement of material

(financial) well-being and social well-being (social relations based on respect for dignity). This

could prevent negative organizational behaviour such as mobbing or work-related phenomena such

as occupational burnouts.

Originality/value. The paper is a conceptual article investigating how the notions of labour in

economics and sociology influence the economic and humanistic paradigm of management. It also

makes an original contribution regarding the impact of the COVID-19 pandemic on HRM methods.

Keywords: labour, economic/non-economic action, economic/humanistic HRM


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INTRODUCTION

Work is central to everyone’s life. It is a source of income, enables the implementation of

life plans and goals, facilitates one’s own development, provides a sense of security, and is

sometimes the meaning of life. In a market economy, labour becomes a complex and

diverse action. Due to globalization and digitalization, the forms of labour are changing. In

these circumstances it is important to rethink the understanding of labour, particularly in

economics and sociology, and find out the consequences of these different understandings

for business.

The main problem addressed in this paper is whether labour as an economic action is

enough for companies to succeed in the modern market or whether an idea of a job as a

non-economic action is needed as well. The subject of this article lies on the borderline

between economics and sociology. That is why there is a need to know how labour is

defined in these disciplines, i.e. neoclassical economic theory and sociology. The other

point is to understand what an economic action and a non-economic action are and how

both could be applied to the paradigm of management. The words ‘work’ and ‘labour’,

though they are not entirely synonyms and have their own meanings, will be used

interchangeably for the sake of the article.

Work in a historical perspective

From ancient times to the Middle Ages, labour and productive activity were seen as below

the dignity of a free man. Work was done by slaves and craftsmen under duress. The ideal

way of life was to do little or no physical work. However, despite the universality of this

ideology, the first church fathers (John Chrysostom, Basil of Caesarea, Ambrose, Irenaeus)

did not share the opinion that work was opus servile. On the contrary, they believed work

to be opus humanum. They had a vision of work that would honour a man, correspond to

his dignity, express this dignity and even increase it (Pirson et al., 2016).

In the late Middle Ages, there was a significant controversy between the clergy and the

Mendicant orders (Franciscans, Dominicans) regarding the attitude towards physical

labour. New views on the role of work and its place in human life emerged at the time

(Sison, 1992). Any productive activity that engaged the entire human being – not only the

body, but also the soul and reason – began to be regarded as work, according to the term

‘opus humanum’. In this way, work gained access to the sphere of dignity to such an extent

that it was recognized as a ‘human act’, an activity of a rational and free person which

reflected his intrinsic value.

In this new approach, a working person begins to identify with his work, transferring his

inner dignity onto it as onto something personal and as onto the property of the one who

performed the act. During this period, work obtained an instrumental value (bonum utile),

which was not an autotelic value in itself. Thomas Aquinas highlighted three instrumental


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values of work: avoiding idleness, equipping people with higher skills and obtaining means

of subsistence. Given the reasons above, work was considered an element of natural law,

not just a divine recommendation.

These three instrumental values reflect the developmental, dynamic aspect of human

dignity. Human dignity reaches its fullness by working and thanks to work. Therefore,

work is a human vocation: man expresses himself through work; humanity is fulfilled

through work and because of work.

In the concept of Thomas Aquinas, there are differences between natural moral principles,

some of which result from community needs, others from individual needs. The work done

to obtain resources necessary for subsistence responds to collective needs. Work creates a

common good. When a departure from physical labour is observed – for example in the

case of children, disabled people, the elderly, Mendicant orders – intellectual work

appears. This is a step forward in creating a reputation for work as being closely related to

human dignity (Sison, 1992).

The process of raising the status of work and including intellectual work in the concept of

human labour (as related to dignity) was halted during the Reformation. Luther

undermined the legitimacy of Mendicant monasteries. In his opinion, the monks should

work like all other people, not only to earn a living, but also for their own salvation.

According to him, the duty of manual labour applied to everyone without exception. To

this interpretation of work, Calvinists added that success at work is evidence of God’s

grace and predestination. Such an understanding of work undermined the previous

conviction of spirituality’s superiority over physical work. It also undermined the

superiority of autotelic values, which are goals in themselves, over instrumental values

directly related to work. In the approach adopted by the Reformation, instrumental values

prevailed (Sison et al., 2016). A return to the issue of human labour could once again be

observed at the end of the 19th century, when the Catholic Church defended workers’

rights (Encyclical of Leo XIII, 1891). A departure from the traditionally accepted

perspective of work morality towards work theology took place (a possible approach to

God through work). The obligation to work and the right to work are inherent in human

nature. People express themselves and increase their dignity through work.

In the European tradition, dignity is perceived in the post-Kantian perspective as an

inalienable quality of a human being regardless of race, sex, age, social status, ethnicity or

nationality. Kant claimed that there are things that have no price but have value in

themselves. Dignity is such a feature. Kant believed that only human beings had dignity.

Thus, dignity in a broad understanding can only be human.


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The notion of labour in economics and sociology

Nowadays labour is a complex notion. In this part of the paper, an attempt will be made to

verify whether the notions of labour are alike in sociology and economics and determine

the problems and possibilities of the definitions of labour in both of these sciences.

From the sociological point of view, talking about labour is talking about the relationships

between employers and workers. These relationships may be organized both in the form of

“paid employment” and in the forms of “unpaid, voluntary, and forced labor” (Elger,

2006). It is significant that all these forms of labour can be understood within the

framework of different paradigms, such as Marxist, capitalist or institutionalist.

The economic view on labour recognizes human beings as factors of production

(Rogozhnikova, 2018). Consequently, a short excursus on the theory of human capital to

clarify the economic view on labour is needed. G. Becker, a co-founder of the theory of

human capital, gave a broad interpretation of capital as not only labour and land, but also

schooling, computer training courses, medical care expenditures, and lectures on the

virtues of punctuality and honesty. These constitute human capital because people cannot

be separated from their knowledge, skills, health, or values in the way they can be

separated from their financial and physical assets (Becker, 2008). T. Schultz expressed this

thought in a very significant phrase: the “economic value of man” (Schultz, 1972). He

emphasized a “strictly economic” essence of the theory of human capital. That is, human

capital is broader than just labour, because it includes some aspects behind the labour

process: preparation for labour, further training, private medical insurance and the like.

This view on capital was all new to both classical and neoclassical economics. The theory

of human capital, originally innovative, was simplified by neoclassical economics. This

simplification consisted of the assumption that earning on human capital had become more

important than investing in it.

When comparing sociological and economical definitions of labour, the following

conclusions can be drawn:

The sociological definition of labour reveals itself through the analysis of the

relationships between the parties involved in the labour process. This approach

allows one to trace different changes in the organization of the labour process and

in understanding it, caused by changes in society and in paradigms of

understanding labour itself.

The modern economic view on labour defines it by referring to the theory of

human capital. The human capital theory includes phenomena which get their

specific economic value when they become elements of the labour process and by

way of evaluating this process. This theory changed the human’s view of himself,

placing an individuum in the centre of the labour process as a commodity. Society

is all products, not persons. People / products have a price tag; having a price, they

lose the dignity which is priceless.


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Labour as an economic and non-economic action

Work means taking specific actions. An action is defined as a purposeful, conscious and

responsible operation: physical or mental. Since labour has an economic understanding as

a prevailing one, we define it as an expedient activity of economic value production using

our knowledge and skills.

Work can be interpreted as an economic or non-economic action. To explain the difference

between these meanings, the question of the difference between economic and social

aspects of reality, or how economic and social aspects relate to each other, must be

answered (Rogozhnikova, 2018). There may be at least three points of view on the

relationship between the economic view and the social approach.

The first one assumes that economics is social; thus, there is no need for the particular

science of sociology. In principle, no other action than economic exists. One should simply

strengthen and develop the scope and method of economics. And if sociology nevertheless

exists, its only purpose is to use economic methods and approaches in further sociological

research. Trying to keep itself alive, sociology can also criticize economics, but it will

remain just a “negative program” (Judin, 2010).

The second point of view treats economics and sociology as two independent spheres. The

difference between them lies in different logics which are expressed in different notions,

terms and concepts. Here, a social action is completely different from an economic one.

The third approach considers economics to be a case of sociology. Economic and social

aspects constantly overlap. Even if there is an economic language, it includes notions and

concepts not just from economic science, but also from philosophy, politology, law,

psychology, sociology, and elements of natural language as well.

Taking these three points of view into account, a conclusion can be drawn that there are

also three options to understand labour (Rogozhnikova, 2018).

The first assumes that labour is just an economic action, because there is nothing apart

from economics.

The second supposes that labour can be considered both as an economic and as a social

action. It is economic when the supply and the demand of labour are considered, and it is

social when we mean the relationship between a worker and an employee or the social

structure of the labour process.

The third treats economic labour as a case of social action, because even when the supply

and the demand are considered, there are always social processes and structures that labour

is involved in. One can abstract from this background while analyzing the economic

meaning of labour in particular, but to understand the matter of labour, the social roots of

economics must be taken into account. Everything that was said above allows one to

specify the issue of labour as an economic and a non-economic action.


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H. Arendt (1998) treated labour as a non-economic action. In her understanding it is

important for humans just to live as a biological species, while labour as a non-economic

action is necessary in case of survival as non-biological creatures. Which seems to be more

important? Our biological nature is basic to the non-biological one. That is, labour as a

non-economic action correlates with labour as an economic action. Economic labour gives

us the means to do non-economic labour, and the latter helps us not just to recover, but to

feel like people, and not only like mechanisms.

Thus, we may list the following specifics of a non-economic action (Rogozhnikova, 2018):

it is a type of work with any aim except for an economic one

it has diverse motives, again except for economic ones

it is connected to human dignity

it is a personal activity

it should be in balance with economic labour

The human model which could reflect such behaviour ought to be an interdisciplinary one.

However, staying inside the economic field of research and understanding, for example,

the constraints and possibilities of labour behaviour, the convergence of each sphere,

economic and social, should be visible. The philosophy of economics can develop such a

model for applying in cases of complex and interdisciplinary problems, such as labour.

The consequence of understanding work as an economic and non-economic activity results

in two different management paradigms. Work as an economic activity entails the

economic management paradigm. On the other hand, work as a non-economic activity

entails a humanistic paradigm in management. In addition to a different understanding of

work, both approaches and their paradigms perceive a worker differently.

Man in the economic paradigm

Contemporary management theory created by economists derives from neoclassical human

theories (Ghoshal, 2005). According to its assumptions, people strive to increase the

material utility of broadly understood benefits. However, it is common for them to prefer

their own individual benefits, rather than social, collective ones.

Economic management assumes that each individual enters into relationships with other

people primarily to meet his own needs (Pirson and von Kimakowitz, 2014). In this way,

man seeks satisfaction from his efforts, often acting opportunistically for his own gain. A

person perceived in this way, called homo economicus, is someone acting in accordance

with the principles of economic rationality. J. S. Mill, a representative of classical

economics, was the first to outline the psychological model (theoretical construction) of a

homo economicus. He stated that political economy accepts in advance an arbitrary


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definition of man as a being invariably working to obtain the most necessary needs,

facilities and luxuries, with the least workload and self-denial and in light of the current

level of knowledge (Mill, 2000). In his opinion, economics should focus its research

primarily on human activities resulting from economic motives and lead to material well-

being and wealth. And although he assumed that in the activities of individuals, in addition

to economic motives, there are also moral motives, the former play a dominant role.

The economic paradigm, the source of which is Enlightenment utilitarianism, perceives the

human as an individual engaging only in short-term relationships with other people. Each

commitment is based on the personal interests of the individual, and other people are

treated as means necessary to achieve the goal. Therefore, such a person acts in a

conformist way, and his actions are caused mainly by the lower needs in Maslow’s

hierarchy. Since his activities are not evaluated in terms of universal social utility, he is

considered to be amoral.

The management paradigm based on the homo economicus concept guarantees rational

economic efficiency of human activity. The proponents of this orientation assume that the

main goal of the company is to maximize profit, and the primary and only responsibility

that managers bear is to bring profit to shareholders who own the enterprise (Mazur, 2017).

The effects of widespread use of the economic paradigm in the global economy can be

seen at three levels: systemic, organizational and individual (Pirson and von Kimakowitz,

2014). At the system level, irreversible destruction of the natural environment occurs

because the modern global economy consumes a disproportionate amount of resources

compared to the possibilities. At the organizational level, there is a decrease in social

capital because interpersonal relationships seen in the perspective of profit maximization

are instrumental in nature. In relation to a person, we can observe that the increase in the

level of national income resulting from economic management is not tantamount to an

increase in the level of employee well-being.

Man in the humanistic paradigm

In contrast to the economic paradigm, the humanistic approach assumes that human nature

is not given once and for all and can be improved by systematic education (Pirson and von

Kimakowitz, 2014). However, what distinguishes the economic approach from the

humanist approach is the ethical element, which remains the leading category in the

humanist paradigm. Its significance results from the fact that each person is assigned an

inalienable right to respect for their own dignity, regardless of ethnicity, nationality, social

status or gender. The humanistic perspective identifies man as a rational being that realizes

its right to freedom in social interaction based on values. According to Aristotle’s

definition of man, he is a politikon zoon – a being by nature capable of participating in the

social and political life of the state.


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The humanistic trend in management focuses on all phenomena concerning man and his

place in the organization. In search of the roots of humanistic management, the ‘avant la

lettre’ concept of management is sometimes referred to. It sets the good of the human

being as its primary goal (Rąb, 2015). The ideas of utopian socialists C. Fourier and R.

Owen represent examples of the ‘avant la lettre’ concept. Their beliefs are not considered

only as narrowly understood projects of the organization, but are treated as a humanistic

vision of the society of the future. Humanistic management, having utopian thinkers of the

nineteenth century as its precursors, gained its present form during the twentieth century.

Researchers take the perspective of the evolutionary development of humanistic

management principles. Three stages in the process of forming the foundations of

humanistic management can be distinguished. They were shaped respectively at the

beginning of the twentieth century, in the mid-twentieth century and at the turn of the

twenty-first century (Melé, 2009; 2013).

Key assumptions which the humanistic concept of the organization is based on include:

the perception of the organization as a group of people who, as members of the

community, recognize their own well-being and society’s well-being as the main

objective of the organization, and

recognize management as a human practice, the aim of which is to bring about the

best functioning of a given organization (Melé, 2003; 2013).

Humanistic management is accompanied by a cogitation of a deeply philosophical nature.

According to this reflection, it can manifest itself in ontological, epistemological,

axiological and praxeological dimensions (Arandia and Portales, 2015). In the ontological

dimension, it manifests itself through self-awareness, rationality, socialization and

language. In the epistemological one, it manifests itself through humanism and spirituality,

but it can also be observed and analyzed in areas such as sociology of work, anthropology

and phenomenology. In the axiological dimension, it manifests itself through respect for

human dignity, equal treatment of all people, empathy, solidarity, freedom, trust and

responsibility. In praxeology, humanistic management is demonstrated through the

development of talents, dialogue with the internal and external stakeholders of the

organization, and management compatible with the broadly conceived concept of

sustainable development.

Humanities management vs economic management

The relation between management based on the economic and humanistic paradigms can

be described as twofold. Two positions concerning both can be outlined: separation and

integration.


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Separation approach

The “founding fathers” of management studies are thought to be M. Weber and F.

Taylor. It is recognized that M. Weber initiated the humanistic trend, which then

began to develop particularly within universities, and F. Tylor gave rise to the

economic trend, represented primarily by economics universities and commercial

schools (Kostera and Kociatkiewicz, 2013). Despite the fact that in recent decades

these two trends have overlapped, repeatedly met intellectually and supported each

other, some researchers claim that since their inception, they have retained their

own distinctiveness because of the different subjects undertaken in their framework

areas and different methodological preferences (Kostera and Kociatkiewicz, 2013).

Table 1 depicts the differences between the approaches in relation to basic

management issues, such as the accepted paradigms, the aim and object of research

and the research methods applied in the two approaches.

Table 1

Humanistic and economic trends in management studies

Specification Humanistic trend Economic trend

Main precursors Adam Smith (moral

philosophy)

Max Weber

Elton Mayo

Adam Smith (economics)

Frederick Taylor

Henri Fayol

Paradigms Radical-humanistic Imperative Functionalist Radical-

structural

Methodology Qualitative case study Quantitative case study

Subject of study Organizations (and

management) from the human

perspective

Organizations (and

management) from an

efficiency perspective

Purpose of research

Increasing the well-being of

people in organizations.

Understanding organization

and management mechanisms

from a human perspective.

Increasing organization and

management efficiency.

Understanding organization

and management mechanisms

from the perspective of market

principles.

Source: based on Kostera, M. and Kociatkiewicz, J. (2013).

The research undertaken under both trends is often based on substantially different

paradigmatic bases. In social studies, G. Burrell and G. Morgan (2003) distinguished four

types of paradigms divided between their objective and subjective recognition (depending

on the fundamental beliefs about the nature of science and the nature of society). Both

humanities and economics rely on them.

The humanistic trend prefers two non-objectivistic paradigms (humanistic, evaluative),

while the economic trend is based on objectivistic paradigms (functionalist, structuralist).


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This not only stems from research traditions which these teachings appeal to, but is also

linked to the subject of research adopted. The humanistic trend is essentially interested in

all manifestations and patterns from the point of view of a human and his place in the

organization. Therefore, it seems natural to choose the paradigms that put man in the

centre, emphasizing his ontological status as an actor endowed with causative power and

responsibility (Kostera and Kociatkiewicz, 2013). On the other hand, the economic trend is

understandably interested in the study of phenomena and abstract regularities, detached

from the perspective of individual human experience and subjectivity. Therefore, the

researchers’ inclination to base their research on paradigms assuming both the existence

and the significance of such objective creations should be understood (Kostera and

Kociatkiewicz, 2013). The paradigmatic preferences are followed by the preference for

using specific types of research methods. Those researchers who adopt assumptions

derived from non-objective paradigms (humanists) use qualitative methods to study the

development of phenomena over time (Kostera, 2008). Typical methods of this type are

ethnography, grounded theory, critical analysis of culture, and ethnomethodology. In turn,

the objectivist researchers, representing the economic trend, prefer the formulation of a

general theory, describing the state of things. Quantitative methods, statistical methods, but

also mathematical modelling is what allows them to do this. Both trends share a common

area: case studies of different types, allowing one to define both the growth process and the

state of the phenomenon. A case study may contain both qualitative and quantitative

elements (Szydlo, 2015). In both trends, research using case studies is undertaken

particularly keenly for the purpose of consulting. The difference is that the humanistic

trend prefers the action research consulting type, designed to educate and improve the

fortune of participants in the organization. The economic trend is related to pro-efficiency

consulting. These different types of consulting result from the different research purposes

under the two trends; the humanistic one is oriented toward helping a person improve his

fate, and the economic trend is focused on improving the efficiency indicators of the

organization. The cognitive objective is partially common for both trends – understanding

and describing the organization and management – except that the accepted point of view

is different for humanists and economists; it is either humanistic or related to efficiency. It

is here that the fundamental difference between humanistic and economic management

becomes clear. The first one seeks to answer the question of why manage, and the second

one addresses how to do it.

Integrative approach

Humanistic management involves strategies and practices aimed at creating human well-

being. It unconditionally respects human dignity by subjecting the activities of the

organization to social assessment. By engaging in an open dialogue concerning values,

managers should realize that the ultimate goal of business is to serve people, also in an

economic sense. Humanistic management, by integrating both dimensions of business


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operations – economic and moral – helps companies perform a society-friendly role.

Exclusive economic management does not allow this role to be fulfilled completely.

Humanistic management takes place in organizations that have managed to develop

financially attractive business models and business practices that respect human dignity.

Humanistically managed companies create products and provide services that are directed

to meet true human needs and do so in a way that respects the expectations of all

stakeholder groups. Numerous studies prove that social entrepreneurship largely

implements the premises of humanistic management. A truly humanistic business is one

that stops at achieving a satisfactory profit without absolutizing its maximization, and as a

priority it assumes to make a human being a measure of all things (Von Kimakowitz et al.,

2011). The main goal of companies implementing humanistic management is to eliminate

human suffering and create conditions leading to a better life. Humanistic management,

putting profit after people, also recognizes their role in achieving its goals. The integrated

model of humanistic management indicates the need to relativize financial profit in relation

to the humanistic goals of the organization. Profit, as H. Spitzeck argues, is a necessary but

insufficient condition for humanistic management (Spitzeck, 2011). He considers the

moral values and humanistic perception of management as necessary for the sustainable

future of our planet and necessary in respecting human dignity in a business environment.

In 20th-century management theory, the mainstream was based on the perception of man

in the category of homo economicus. In light of the adopted model of the human being in

economic theory, business was perceived through the prism of economic profit and human

relations were viewed as ordinary transactions. This approach meant that managers only

included economic facts, ignoring the human and ethical dimensions of business

operations (Mele, 2013). The humanistic synthesis, which is a different view on the ethics-

economics relationship in an economic activity, perceives ethics as the internal dimension

of human action and, consequently, of all economic actions. W. Grassl and A. Habisch

(2011) emphasize the interdependence of ethics and economic activities and their

inseparable ontological relationship.

Therefore, the preference for the paradigms putting man at the centre, emphasizing his

ontological status, and recognizing him as a being endowed with agency and responsibility

seems to be natural.

According to practitioners, humanistic management was created as a complement to

economic management, which is understood as hard, project-type management. It was also

a supplement to the universally applicable (until recently) management culture based on

summaries, analyses, tables, and a very orderly decision-making process. In this approach,

economic management is a set of processes, rules, and principles of a person who manages

a team performing specific tasks and accounts and overseeing the tasks ordered (Mazur,

2017).

The beginnings of humanistic management are associated with the emergence of new

management methods: diversity management, talent management, age management, etc.


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This particular type of management became more important when managers started to rely

less on lists and tables and began noticing the role of teams in organizations. In this regard,

it was important to select the right people for a team. It was insufficient to respect the

deadlines and procedures specific to project management; personality, partnership at work,

and ability to work in a team began to gain significance.

In humanistic management, the selection of appropriate people with a set of similar values

and interests and a common way of perceiving reality was considered key. In such

management, the greatest difficulty is to engage employees because the line between

humanistic management and an interregnum is thin.

In the case of young managers, it is primarily beneficial to embed economic management

culture and, over time, to give it elements of humanistic management.

DISCUSSION

The pandemic is changing the methods of managing people. In a crisis situation, the health

and safety of employees turn out to be the most important things. Among many types of

crisis situations, pandemics have the capability of creating widespread change. Using the

same habitual management styles and practices is often inadequate in such mass-scale

disruption. One of the reasons for this change is that during the COVID-19 pandemic, man

became the guarantor of the effective operation of enterprises. Therefore, the need to care

for the well-being of employees resulted in an approach integrating the economic and

humanistic paradigm in people management on a larger scale. The role of HR departments

has also changed. Many of them considered it their task to listen to employees, be in touch

with them and address their needs and concerns as best as possible. In this perspective the

humanistic paradigm is getting closer to the commonly used economic paradigm of human

resource management.

The support and care for the well-being of employees in the pandemic era manifested itself

in the fact that, whenever possible, employees were encouraged to work from home.

Companies also ensure that people have the right equipment and tools to work online.

According to the theory of organizational support, employees who perceive their

workplace as supportive are more sympathetic to their organizations and willing to invest

more effort in the tasks performed. Such a strategy of approaching employees is therefore

not only humanistic, it is also profitable in the long run.

CONCLUSIONS

1. Work understood as economic action and non-economic action is the basis of two

different management paradigms, respectively economic and humanistic.


17

Combined in an integrated method of management, they create a new human

model in management referring to man as homo economicus and politikon zoon.

2. Labour as an economic and non-economic action shows how different activities in

our life correlate to each other, and that there is a need to find a balance between

them in everyday life. In the case of further dominance of work understood as

economic activity, the economization of social life will be more and more

common, which may end up with the total mechanization of our lives. There is no

other possibility to understand complex phenomena in any field of research

concerning the human being, except for studying human actions. Understanding

the labour process, especially with regard to humanistic management, could be

very fruitful for the economic view on the human being.

3. Adopting a humanistic perspective in the management process may be a

significant contribution to a holistic study of the organization and its activities,

which were previously mostly the domain of economists. Both descriptions of an

organization – economic and humanistic – are complementary and create the

characteristics of the same phenomena in light of each of these approaches.

Considering the positions presented, the statement that management needs

humanists and humanists need management seems to be more than relevant.


18

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Received: 2 April 2020


DOI: 10.32025/JBM19002

In search of high-performance

workplace factors among SMEs

JANIS GERCANS

ABSTRACT

Purpose. Small and medium-sized enterprises (SMEs) are essential contributors to employment

creation and global economic growth. For long-term survival in the market, SMEs need the

capabilities to organise their resources in a way that leads to high performance and competitive

advantage. Based on the conceptual framework of entrepreneurial orientation and the resource-

based view of the firm, performance-influencing organisational factors among SMEs providing

manufacturing services are analysed.

Methodology. In this study, the financial performance of 47 SMEs was analysed, and a survey of

499 employees was conducted. Financial performance was evaluated by ROA and ROS, and

productivity was measured by turnover and net profit per employee to identify high-performance

SMEs. Competitive aggressiveness was measured by changes in the market share to verify whether

the high-performance group of SMEs corresponds to the entrepreneurial orientation construct. A

questionnaire with a six-point Likert scale and the Mann–Whitney U test were used to test the

hypotheses.

Findings. The managerial capabilities to create strong workplace performance exist where: (a)

management has a respectful attitude toward employees, (b) management supports the development

of employees’ professional skills, (c) employees are provided with everything they need to achieve

high job results, (d) employees want to work for the company in the long term, (e) remuneration to

employees is fully in line with their level of professional skills, (f) co-workers perform their work

effectively, (g) employees work shorter job shifts. These elements constitute the knowledge-based

resources of high-performance SMEs, giving them, at a minimum, a temporary competitive

advantage.

Value. The findings of this article contribute to the literature on entrepreneurial orientation,

supplementing the construct of organisational factors with the characteristics of managerial

capabilities leading to high performance and competitive advantage.

Keywords: entrepreneurial orientation, managerial capability, performance, forestry SMEs

Paper category: research paper


21

INTRODUCTION

On the global scale, the process of delivering goods and services to consumers has become

highly specialised. Businesses focus on their strengths in home markets and outsource their

other needs (World Bank, 2020), thereby creating global value chains with multiple

companies involved in the manufacturing process. A typical model of a global value chain

consists of large organisations that contract smaller organisations for the services needed to

deliver their products to the market. Therefore, small and medium-sized enterprises

(SMEs) become an important link in the creation of wealth across the globe. According to

Ayyagari et al. (2014), the SME sector’s contribution is comparable to that of large firms.

SMEs have the largest share of employment creation and the highest sales and employment

growth. Large companies, however, have higher productivity growth. Therefore, it is

essential to focus research on the capabilities of SMEs to survive and thrive as a part of a

value chain or as individual companies.

To be successful in the market, a company needs to create a competitive advantage. The

creation of sustained competitive advantage depends on the unique resources and

capabilities that a company uses to compete in its market. Managers must search inside

their company for valuable, rare and costly-to-imitate resources, and then use these

resources in their organisation (Barney, 1995). Therefore, managerial knowledge and

capabilities play an important role in the success of a company. In particular, managerial

capabilities can be internal factors that limit the growth of a company (Penrose, 1959)

because the valuable, rare and socially complex resources and capabilities of the company

must be organised in a way that exploits its full competitive potential (Barney, 1995).

From the perspective of the resource-based view of the firm (RBV), resources can be

divided into those that are knowledge-based and those that are property-based (Penrose,

1959; Miller and Shamsie, 1996). Managerial capabilities comprise a knowledge-based

resource of a company and, compared to property-based resources, are better designed to

respond and adapt to the challenges facing the company. This is because knowledge-based

resources provide the company with the skills needed to adapt their products to market

needs and to deal with competitive challenges (Miller and Shamsie, 1996).

Moreover, the complexity and tacitness of technological knowledge are useful for

protecting the significant product improvements of a company from imitation (McEvily

and Chakravarthy, 2002). However, companies with similar capabilities might have

different economic returns depending on the composition of their competitors (Chatain,

2010). This might also be explained by the fact that the performance of a company

depends on the performance of its employees, regardless of the size of the company and its

other characteristics (Aguinis, 2009). In this light, the proposition by Hansen et al. (2004)

is very topical. Hansen et al. propose to shift the focus of RBV research from the

relationship between resources, capabilities and the financial performance of the company

to the relationship between administrative decisions and company-level financial

performance. For this purpose, the entrepreneurial orientation (EO) construct is a suitable


22

approach. It embraces an essential aspect of the way a company is organised, and it

suggests that knowledge-based resources are positively related to a company’s

performance and that EO enhances this relationship (Wiklund and Shepherd, 2003).

Considering that SMEs individually, or as a part of large organisations’ value chains,

contribute remarkably to global economic activity – and that the managerial capabilities of

these companies play an essential role in the management of resources, the creation of

competitive advantage and the growth of the companies – the following research question

is proposed: What differentiating characteristics of managerial capabilities result in high

performance and competitive advantage of SMEs? The objective of this article is to

determine the differentiating characteristics of managerial capabilities in high-performance

SMEs. The study is based on the conceptual framework of EO and the resource-based view

of the firm.

The next section of the study is the literature review, a depiction of the theoretical

background and the development of the hypotheses. The third section contains a

representation of the research methods. In the fourth section, the study results are reported.

Then, in the fifth section, the findings are discussed, and recommendations for further

research are proposed. In the sixth section, the article concludes with an outline of the

limitations of the study.

LITERATURE REVIEW

The resource-based view of the firm

RBV focuses on the resources and capabilities controlled by a company that underlie

persistent performance differentials among competitors (Peteraf and Barney, 2003). A

business company is both an administrative organisation and a collection of productive

resources (Penrose, 1959). The value of administrative, or knowledge-based (Miller and

Shamsie, 1996), resources is reflected in the quality of administrative decisions that

influence the performance of the company (Hansen et al., 2004). To create more value than

its competitors, a company must produce greater net benefits, through superior

differentiation and/or lower costs (Peteraf and Barney, 2003). Although companies may

possess similar or homogeneous property-based resources, due to different knowledge of

how to exploit them, companies are capable of rendering different productive services

(Penrose, 1959). This means that, due to resource heterogeneity, some companies have

resources that generate more value than others (Peteraf, 1993). Therefore, companies with

superior, more value-generating resources will have a competitive advantage (Peteraf and

Barney, 2003). The more valuable and rarer a company’s resource-capability combinations

are, the higher the probability will be that it will have a competitive advantage (Newbert,

2008). Meanwhile, a company has a competitive advantage if it is capable of generating

more economic value than a marginal competitor in its product. Also, the economic value


23

generated by a company is the difference between the perceived benefits of the product

buyers and the economic cost to the company. Several or even many companies in a given

industry may have a competitive advantage (Peteraf and Barney, 2003). The potential of a

company’s competitive advantage depends on the value, rareness, and imitability of its

resources and capabilities, as well as on its organisational readiness to exploit these

resources and capabilities, known as the VRIO framework (Barney, 1995). Resources and

capabilities, such as research and development intensity and advertising intensity,

positively influence financial performance, lead to resource heterogeneity and assist a

company in achieving competitive advantage (Nair and Bhattacharyya, 2019). Previous

studies on EO show that when applied to the VRIO framework, EO represents how a

company is ready to discover and exploit opportunities (Wiklund and Shepherd, 2003).

Therefore, in this study, RBV and EO are taken as theoretical concepts to explain how

characteristics of managerial capabilities result in SMEs having a high level of

performance and a competitive advantage.

Entrepreneurial orientation

EO is positively associated with the financial performance of a company (Poudel et al.,

2019). EO can assist in the explanation of managerial processes that provide some

companies with the capability to use their resources and to respond to challenges earlier

than their competitors (Wiklund and Shepherd, 2003). EO is characterised by

entrepreneurial themes, which include the dimensions of autonomy, innovativeness, risk-

taking, proactiveness and competitive aggressiveness (Lumpkin and Dess, 1996; Wales et

al., 2020). It moderates the relationship between a collection of knowledge-based

resources and company performance (Wiklund and Shepherd, 2003). Managerial

competence is a vital function of the quality of the entrepreneurial services available to the

company (Penrose, 1959). Factors such as managerial style, need for achievement and

other social or motivational factors might help to explain a company’s performance

(Lumpkin and Dess, 1996). EO, as an organisational property, shows up when an

organisation’s top management style, organisational configuration, and new entry

initiatives demonstrate an entrepreneurial theme (Wales et al., 2020). Companies managed

by executives with high individualism will have a higher performance than those whose

executives have low individualism (Yucel, 2011). Executives with superior reasoning and

problem-solving capabilities are likely to have more potential to design more effective

business models and to make more intelligent investment decisions (Helfat and Peteraf,

2015). Moreover, executives whose personalities reflect higher core self-evaluations have

a stronger positive influence on their company’s EO (Simsek et al., 2010). Furthermore,

EO facilitates SMEs in achieving environmental sustainability and improving performance

(Amankwah‐Amoah et al., 2019), while green purchasing capabilities have a positive

effect on the growth of a company, and this relationship is positively moderated by the

environmental orientation of the chief executive officer (CEO) (Andersén et al., 2020).

CEO founder status is positively related to EO (Deb and Wiklund, 2017). This indicates


24

the importance of managerial capabilities in leading a company to success in the market.

Capabilities, in general, encompass the capacity to perform physical and mental activities

(Helfat and Peteraf, 2015). Meanwhile, managerial capabilities embrace the managerial

knowledge of individuals who work in the company. The individual’s managerial

knowledge consists of such domains as managerial, functional, technical, company and

environmental knowledge (van den Bosch and van Wijk, 2001). Therefore, knowing how

to create a high-performance workplace is a prerequisite to building a successful and

competitive company, and managers play the leading role in this process.

Workplace

High-performance work practices in the development of individual workers’ key

competencies are essential in the creation of a high-performance organisation (Leoni,

2012). A study by Doeringer et al. (1998) shows that Japanese hybrid workplace

systems emphasise social and organisational learning, employee participation in

problem-solving and employee commitment as the principal means of motivating

labour efficiency. Employees are rewarded with career advancement and high wages,

and they respond with high labour productivity. Additionally, Smith (2003) points

out that training structures and policies need to be supportive of learning in the

workplace, and training personnel need to be skilled.

Furthermore, improvements in workplace organisation, including re-engineering, teams,

incentive pay and employee participation, are a significant component of productivity

growth. Productivity is higher in companies with more highly educated employees (Black

and Lynch, 2001; 2004), flexible job assignments and employment security (Ichniowski et

al., 1997). However, the effect of these practices on employees’ welfare is diverse (Black

and Lynch, 2004). Therefore, reward management is important in a company, which

includes necessary strategies, policies and processes to ensure that the value of employees

and the contribution they make to achieving objectives is recognised and rewarded

(Armstrong, 2012). Many studies show that when monitoring costs are low, piece-rate

payment is appropriate (Lazear, 1986) and pay-for-performance increases productivity

(Shearer, 2004; Gielen et al., 2010) and attracts more skilled employees (Lazear, 2000;

Gielen et al., 2010). Nonetheless, individuals value pay differentially, and those who attach

a higher perceived value to pay are those who perform at higher levels in an incentive

environment (Fox et al., 1993). However, reward management is not just about pay and

employee benefits. It is also about non-financial rewards such as recognition, training and

development opportunities and increased job responsibility (Armstrong, 2012).

Moreover, productivity increases when working alongside more capable friends (Bandiera

et al., 2010). However, managers are important actors in the creation of a high-

performance company. Knight (2000) stresses the importance of managers in adapting to

changes in their environment at a tactical level and an operating level to employ the tactics


25

needed to maintain or enhance the company’s performance. Process management practices

play an essential role in the adoption of environmental practice (Jakhar, 2016). Eisenhardt

(2013) points out that successful top management teams are diverse, have a history of

working together, can be conflictual but are quick to make strategic decisions, rely on

‘simple rules’ and are capable of designing an organisational structure. However,

Buckingham and Coffman (1999) argue in their study that great managers do not believe

that, with enough training, an employee can achieve anything; they do not try to help

employees overcome their weaknesses but focus instead on the strengths of each

individual. The authors also argue that no matter how generous its pay or how significant

its expertise, a company that lacks great front-line managers will fail. Thus, the importance

of managerial capabilities in creating a high-performance workplace is beyond question,

and, according to Buckingham and Coffman (1999), the strength of a workplace can be

measured by twelve questions, which cover the main elements needed to attract, focus and

keep the most talented employees. However, Buckingham and Coffman’s study (1999)

embraced small and large companies from various industries. Therefore, in this study, it is

argued that the differentiating characteristics of a high-performance workplace in the

context of SMEs might differ from those found in previous studies. Thus, based on

Buckingham and Coffman’s (1999) characteristics of the high-performance workplace, and

given that the performance of a company depends on the performance of its people

(Aguinis, 2009) and that due to resource heterogeneity some companies have resources

that generate more value than others (Peteraf, 1993), the following hypotheses are put

forward:

H1: the management of high-performing SMEs has the capabilities to create a workplace

that differs significantly by having the following characteristics of a productive workplace:

a) employees’ remuneration is based on pay-for-performance

b) employees’ salary is fully in line with their level of professional skills

c) employees always receive recognition from company management for a well-

performed job

d) employees are doing the job they can do best

e) employees are supplied with everything they need to achieve high job results

f) employees know what is expected from them

g) employees regularly receive a performance assessment from the management of

the company

h) employees work shorter job shifts

i) the company management has a respectful attitude toward employees

j) the company management supports the development of employees’ professional

skills


26

H2: the management of high-performing SMEs has the capabilities to create a workplace

that differs significantly by having the following characteristics of an engaging workplace:

a) co-workers perform their work effectively

b) employees always share information that can help to improve the skills of co-

workers

c) employees always, when seeing an opportunity, put forward work improvement

proposals to the management of the company

d) employees know that their work is important

e) employees want to work for their current company in the long term

f) relations among co-workers in the company are professional and friendly

In summary, based on the conceptual framework of EO (Lumpkin and Dess, 1996), the

hypotheses derived from the literature review are elaborated in the following model.

Figure 1 Managerial capabilities within the conceptual framework of EO

METHODOLOGY

In this study, the financial performance of 47 SMEs is analysed, while a survey of 499

employees was conducted between May and August 2019. All companies operate in the

forest industry of Latvia. The employees surveyed were reached during training seminars

organised by JSC Latvia’s State Forests. Paper-form questionnaires were used. Survey data

was analysed by SPSS (Statistical Package for the Social Sciences) software. To test the

hypotheses, a questionnaire with a six-point Likert scale from “strongly disagree” to

“strongly agree” was used. Before the survey, the questionnaire was pilot-tested to ensure

Entrepreneurial orientation

Autonomy Innovativeness Risk-taking Proactiveness Competitive aggressiveness

Environmental factors

Organisational factors

Managerial capabilities characterised by: H1

H2

Performance ROA ROS Productivity


27

the clarity of the questions. It is suggested that studies should include multiple

performance measures, including traditional accounting measures and other elements of

broader stakeholder satisfaction (Lumpkin and Dess, 1996). However, Pankaj and Rivkin

(2006) point out that a company that earns superior, long-term financial returns within its

industry has a competitive advantage. Therefore, in this study, financial indicators of eight

years are taken from the Lursoft database to distinguish between high-performing SMEs

and their competitors. Financial performance was evaluated using ROA (return on assets),

ROS (return on sales) and productivity measured as turnover and net profit per employee.

To identify high-performance SMEs, the following steps have been taken: (1) For each

financial performance criterion, SMEs were ranked in descending order according to mean

values over eight years, and the rank value was attached, where 1 means the highest

performance and 47 the lowest. (2) The mean value of ranks for each SME was calculated.

(3) SMEs were ranked in ascending order by the mean value of ranks, where the lowest

value means the highest average performance in a given criterion. (4) In the final step, the

list of SMEs was divided into quartiles, and the first quartile of SMEs with the lowest

mean values of ranks was set as the first, high-performing group of SMEs, and the second

to fourth quartiles were set as the second group of SMEs. Competitive aggressiveness

(Lumpkin and Dess, 1996) was measured by the changes in the market share for the eight-

year period to verify whether the first group of SMEs corresponds to the EO construct. All

selected companies provide roundwood manufacturing services for JSC Latvia’s State

Forests, where contracts are awarded in open tenders, and the price for the service is a

dominating factor. Therefore, the changes in the market share represent the

competitiveness of the company. The Mann–Whitney U test was used to test the

competitive advantage of the first group of SMEs. Cronbach’s was applied as a test of

the questionnaire data reliability. The Mann–Whitney U test was used to test the

hypotheses, as the data do not meet the requirements of a normal distribution.

The methodology for the selection of high-performance SMEs and the test of the

hypotheses of this study are illustrated in the following model:


28

Figure 2. Methodology for the selection of high-performance SMEs and the test of

hypotheses

RESULTS

Financial returns of the eight-year period were analysed to identify whether the first group

of SMEs had a competitive advantage. The results show that the first group had

significantly higher ROA, ROS, turnover per employee and net profit per employee in this

period. The results are presented in Table 1.

Table 1

Mean values of eight-year period (2011–2018) financial returns of SMEs (n = 47) and

number of employees

Criterion ROA, % ROS, % Turnover per

employee,

K€

Net profit per

employee, K€

Number of

employees

group

(n = 12)

18

(SD 14.8)

11

(SD 5.9)

100

(SD 66.9)

11

(SD 13.4)

43

(SD 35.5)

group

(n = 35)

4

(SD 57.5)

4

(SD 8.3)

72

(SD 96.1)

2

(SD 4.5)

43

(SD 43.8)

p-value <.001 <.001 <.001 <.001 .191

Sig. at a level of p 0.05


29

Thus, the selected group of high-performing SMEs has a competitive advantage over its

competitors in the second group. However, the number of employees is not significantly

different, and the companies can be classified as SMEs based on the definition of the

European Commission (Eurostat, 2020).

The changes in the market are analysed to verify whether the first group of SMEs

possesses competitive aggressiveness. The results are presented in Figure 3.

Figure 3 Changes in the market share of the first and second groups of SMEs

SMEs in the first group were capable of increasing their market share from 21% in 2012 to

51% in 2019, a 30% increase in eight years. However, the second group of SMEs lost one

percent of its market share in eight years. It is thereby confirmed that the first group of

SMEs possesses competitive advantage and EO as measured by competitive

aggressiveness.

Before the test of the hypotheses, internal consistency was measured using Cronbach’s

(Cronbach, 1951). For H1 = .839, and for H2 = .716, which represents good and

acceptable internal consistency (Taber, 2018). For respondents from the first group of

SMEs, n = 236; for the second group of SMEs, n = 263. The results of the H1 hypothesis

test are shown in Table 2.

21%

28%

34%37% 39%

45%47%

51%

44% 43% 43% 44% 44%

42% 41% 43%

35%

29%

22%19%

16%13% 12%

6%0%

10%

20%

30%

40%

50%

60%

2012 2013 2014 2015 2016 2017 2018 2019

Market share of 1. group Market share of 2. group Market share of other SMEs


30

Table 2

The results of the H1 hypothesis test

No. Item Group

of SMEs

Mean

rank U p-value

H1e Employees are supplied with everything

they need to achieve high job results

1 272.4 25737.0 <.001

2 229.9

H1i The company management has a respectful

attitude toward employees

1 279.1 23937.5 <.001

2 223.0

H1b Employees’ salaries are fully in line with

their level of professional skills

1 261.2 25383.0 .006

2 227.8

H1j

The company management supports the

development of employees’ professional

skills

1 264.7

26633.0 .008 2 233.2

H1j

control

Employees always have a desire to improve

their professional skills

1 248.8 30343.0 .898

2 247.3

H1h Duration of the job shift 1 230.9

26546.0 .015 2 261.4

H1a The salary of employees depends on labour

productivity

1 256.9 29408.5 .261

2 243.8

H1a The salary of employees depends on quality 1 256.6

29228.0 .265 2 243.1

H1c

Employees always receive recognition from

company management for a well-performed

job

1 254.0

28882.5 .320 2 241.7

H1f Employees know what is expected from

them

1 253.0 29854.5 .518

2 245.5

H1f

control

The company management always explains

the requirements for work and their

importance

1 258.6

27812.5 .074 2 237.7

H1d Employees are doing the job they can do

best

1 246.9 30285.5 .744

2 250.9

H1g

Employees regularly receive a performance

assessment from the management of the

company

1 248.1

30563.5 .891 2 249.8


The management of high-performing SMEs has capabilities to create a workplace that

differs significantly by having the following characteristics of a productive workplace: (1)

employees are supplied with everything they need to achieve high job results, (2) the

company management has a respectful attitude toward employees, (3) employees’ salaries

are fully in line with their level of professional skills, (4) the company management

supports the development of employees’ professional skills, (5) employees work shorter

job shifts, 10 h (SD 4.6) and 11 h (SD 7.1) respectively. Therefore, H1e, H1i, H1b, H1j

and H1h of the H1 hypothesis are accepted. Meanwhile, there is no significant difference

in the following characteristics of the productive workplace: (1) employees’ remuneration

is based on pay-for-performance (the salary depends on productivity and quality), (2)


31

employees always receive recognition from company management for a well-performed

job, (3) employees know what is expected from them, (4) employees are doing the job they

can do best, (5) employees regularly receive a performance assessment from the

management of the company. Therefore, H1a, H1c, H1f, H1d and H1g of the H1

hypothesis are rejected.

The H1j part of the hypothesis was controlled by employees’ desire to improve their

professional skills. The results indicate that there is no significant difference between the

employees of both groups of SMEs in terms of the desire to improve their professional

skills (p-value .898). However, only the management of the first group of SMEs shows

support for the development of employees’ professional skills (p-value .008). Additionally,

the H1f part of the hypothesis was controlled for whether managers explain the

requirements for work and its importance to their employees. The results show that there is

a trend (p-value .074) for the management of the first group of SMEs to give more

attention to the explanation of the requirements for work and its importance. The results of

the H2 hypothesis test are shown in Table 3.

Table 3

The results of the H2 hypothesis test

No. Item Group

of SMEs

Mean

rank U p-value

H2e Employees want to work for the current

company in the long term

1 276.2 24852.0 <.001

2 226.5

H2a Co-workers perform their work effectively 1 268.9

26113.5 .001 2 231.2

H2b Employees always share information that

can help to improve the skills of co-workers

1 257.0 27965.0 .105

2 238.1

H2d Employees know that their work is

important

1 249.8 29852.5 .705

2 245.4

H2c

Employees always, when seeing an

opportunity, put forward work improvement

proposals

1 245.2

29833.0 .774 2 248.6

H2c

control

The company management always explains

the feasibility of introducing employee

proposals

1 257.0

27484.5 .087 2 236.1

H2f Relations among co-workers in the

company are professional and friendly

1 248.2 30485.5 .979

2 247.9


The results show that the management of high-performing SMEs has the capabilities to

create a workplace that differs significantly by having the following characteristics of an

engaging workplace: (1) employees want to work for the current company in the long term,

and (2) co-workers perform their work effectively. Thus, the H2e and H2a parts of the H2

hypothesis are accepted. Meanwhile, there is no significant difference in the following

characteristics of an engaging workplace: (1) employees always share information that can


32

help to improve the skills of co-workers, (2) employees know that their work is important,

(3) employees always, when seeing an opportunity, put forward work improvement

proposals, (4) relations among co-workers in the company are professional and friendly.

Therefore, the H2b, H2d, H2c and H2f parts of the H2 hypothesis are rejected. The H2c part

of the hypothesis was controlled by the explanation to employees of the feasibility of

introducing their proposals. The results show that there is a trend (p-value .087) for the

management of the first group of SMEs to put more effort into the explanation of the

feasibility of introducing employee proposals.

Additionally, the results are controlled by the experience of employees in their current job

position and at their present age, since more senior employees are better fitted to tasks than

less senior ones. Therefore, more senior employees exhibit higher productivity and

earnings on average (Harris and Holmstrom, 1982). The results are presented in Table 4.

Table 4

The results of control items

No. Item Group

of SMEs

Mean

rank U p-value

Control Experience in the current job position 1 236.8

27894.5 .319 2 249.5

Control Age of employees 1 226.0

25431.5 .018 2 256.0


The control results show that there is no significant difference between the first group and

second group of SMEs in terms of employees’ experience in their current job position; p-

value .319. Experience in the current job position is 8 years on average, SDs 6.9 and 5.8,

respectively. However, there is a significant difference in employee age between the first

group and the second group of SMEs: 38 years (SD 10.8) and 40 years on average (SD

11.0), respectively.

DISCUSSION

In this study, the differentiating characteristics of managerial capabilities to create a high-

performance workplace in SMEs are explored. First, it was found that in high-performance

SME workplaces, managers supply employees with everything they need to achieve high

job results; management has a respectful attitude toward employees; employee salary is

fully in line with the level of professional skills; management supports the development of

employees’ professional skills; co-workers perform their work effectively; employees

work shorter job shifts; and they intend to work for their current company in the long term.

Therefore, there are seven differentiating characteristics of the managerial capabilities

needed to create a high-performance workplace in an SME. Supplementary to


33

Buckingham’s and Coffman’s (1999) characteristics of the high-performance workplace,

in this study, it was found that employees’ salaries according to their level of professional

skills, shorter job shifts and willingness to work for the current company in the long term

might also characterise the strength of a workplace. The findings of this study contribute to

EO literature and particularly to the top management characteristics that lead a company to

high performance (Lumpkin and Dess, 1996; Eisenhardt, 2013; Buckingham and Coffman,

1999; Yucel, 2011; Helfat and Peteraf, 2015; Simsek et al., 2010; Deb and Wiklund,

2017).

Second, the results show that there is no significant difference in the following workplace

characteristics of SMEs: (1) employees’ remuneration is based on pay-for-performance, (2)

employees always receive recognition from company management for a well-performed

job, (3) employees know what is expected from them, (4) employees are doing the job they

can do best, (5) employees regularly receive a performance assessment from the

management of the company, (6) employees always share information that can help to

improve the skills of co-workers, (7) employees know that their work is important, (8)

employees always, when seeing an opportunity, put forward work improvement proposals,

(9) relations among co-workers in the company are professional and friendly. These are the

necessary characteristics for a workplace to be capable of competing in the market.

However, these characteristics are unlikely to differentiate high-performance companies

from their competitors.

Third, the control variables show that there is no significant difference between employees

of both groups of SMEs in terms of experience in a current job position; the average is 8

years. Moreover, given that the employees of the first group of SMEs are younger by 2

years on average, the higher performance of the first group was not influenced by

differences in years of experience and the fact that more senior employees are better fitted

to tasks than less senior ones, and more senior employees exhibit higher productivity and

earnings on average (Harris and Holmstrom, 1982).

Overall, the results show that apart from the nine common characteristics of SMEs’

workplaces, high-performing SMEs possess seven differentiating characteristics which

give them a competitive advantage, due to resource heterogeneity (Peteraf, 1993) and the

capability to exploit it (Barney, 1995). Moreover, the managerial capabilities to create a

high-performance workplace comprise a knowledge-based resource which positively

influences a company’s performance. Thus, this study supplements the findings of

Wiklund and Shepherd (2003) that knowledge-based resources are positively related to a

company’s performance and EO enhances this relationship. In general, it is argued that

SMEs that have the workplace characteristics included in this study have at least a

temporary competitive advantage because socially complex resources and capabilities are

much more difficult to imitate (Barney, 1995), and managerial capabilities to create a high-

performance workplace are valuable and rare.


34

CONCLUSIONS

1. This study attempted to determine the managerial capabilities necessary to create a

high-performance workplace in SMEs. The managerial capabilities to create strong

workplace performance exist where: (1) management has a respectful attitude

toward employees, (2) management supports the development of employees’

professional skills, (3) employees are provided with everything they need to

achieve high job results, (4) employees want to work for the company in the long

term, (5) remuneration of employees is fully in line with their level of professional

skills, (6) co-workers perform their work effectively, (7) employees work shorter

job shifts. These elements constitute the knowledge-based resources of high-

performance SMEs, giving them, at a minimum, a temporary competitive

advantage.

2. Only some of the differentiating characteristics of managerial capabilities were

included in this study. Therefore, further research might investigate other

characteristics such as team building, employee selection, the decision-making

process, design thinking and other industry-related characteristics that might

positively influence performance and lead SMEs to a competitive advantage.

LIMITATIONS

This study explored the differentiating characteristics of the managerial capabilities of

SMEs in the forestry industry in Latvia, and only manual workers were included. The

creation of a high-performance workplace for knowledge workers (Drucker, 1959; 2002)

might require different managerial capabilities. The findings of such a study might differ

from those of this study.

The sample size of SMEs included in this study consists of 47 companies. A bigger sample

size of companies and a study of other industries or in other countries may reveal

additional characteristics of managerial capabilities or amend the findings of this study.

This is because two trends were noticed in the control questions: (1) the management of

the first group of SMEs gave more attention to explaining the requirements for work and

its importance (p-value .074), and (2) the management of the first group of SMEs put more

effort into explaining the feasibility of introducing employee proposals (p-value .087).


35

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39



DOI: 10.32025/JBM19004

The role of informal institutions in the

relationship between social capital and

international entrepreneurial entry

MUHAMMAD UMER SHAHID

ABSTRACT

Purpose. The goal of the current study is to gain an understanding of how various informal

institutional elements such as trust and corruption control affect the relationship between

entrepreneurial ventures’ social capital and their ability to reach the worldwide market.

Design/Methodology/Approach. The paper draws on internationalization and social capital data

from the Global Entrepreneurship Monitor (GEM), which includes 482,257 observations from 44

countries between 2003-2013, with a focus on early-stage entrepreneurs (as defined by the TEA

index) who are involved in significant international entrepreneurial entry. A multi-level modelling

strategy is employed for analyzing the various hypotheses by using STATA.

Findings. Possessing a high level of social capital makes it easier to start a business at the

international stage. And further, informal institutional variables, i.e., trust and control of corruption,

positively moderate the association between social capital and international entrepreneurial entry;

thus, societies where honesty prevails and corruption is controlled facilitate better international

entrepreneurial entry.

Limitations/Implications. The study is based on informal institutions, i.e., the variable trust taken

from the World Value Survey (WVS) and the variable control of corruption by using a large sample

size and multi-level modelling from World Governance Indicators, which demonstrates the

importance of institutions as systems of shared meanings and noncodified standards. However, there

are a number of other informal institutional indicators to examine that could have an impact on the

relationship at the individual level. Implications from a theoretical perspective explain advancement

of the institutional perspective as a conceptual framework for explaining international

entrepreneurial activity and, further, the study empirically validates the significance of informal

institutional environmental factors in the context of international entrepreneurship.


40

Originality/Value. With the increasing interest of scholars in using the institutional approach and

the availability of limited empirical studies in light of informal institutions, using a multi-level

approach the current study empirically investigates the role of trust and control of corruption in the

context of social capital and international entrepreneurship.

Keywords: social capital, internationalization, international entrepreneurship, informal institutions

INTRODUCTION

There is a surge of literature in the field of international entrepreneurship that highlights

the significance of the idea of social capital as an important descriptive constituent in the

process of internationalization of an entrepreneurial venture (Shahid, 2020; Puthusserry et

al., 2020). And various empirical studies have also highlighted the importance of networks

of relationships, which smoothen and also accelerate the internationalization process of

new ventures (Sedziniauskiene et al., 2019). Social capital helps in acquiring critical

knowledge required in achieving access to international markets (Welch, 2004). Further, in

economies where the institutional structure is characterized by deeply embedded norms,

values and codes of conduct, entrepreneurial social capital appears to play a significant

role in helping entrepreneurs to cope with constraints present in the culture of a society.

The continued reflection on firms’ globalization and their efforts in internationalization

(Inouye et al., 2020) has shifted the interests of scholars towards studying the role of

institutions in this process. Literature on firms entering the international market is gaining

significant attention from policy-makers and academics. This is happening due to a

transformation taking place in various business practices along with changes in informal

institutional environmental factors.

Based on mixed empirical findings reported in the literature on the relationship between

informal institutions and international entry (Muralidharan and Pathak, 2020; Chang and

Rosenzweig, 2001; Luo, 2001) as well as a meta-analysis, a study conducted by Tihanyi et

al. (2005) reported insignificant statistical evidence regarding the relationship between

informal institutions and international entry and, further, highlighted the need for

substantial research in order to fully understand the context of informal institutions. In

light of this assumption, the study tried to report positive empirical findings on the

moderating role played by informal institutions in the context of social capital and

international entry, which is the objective of this study as well.

In the context of international entrepreneurship research, the limited use of institutional

theory has been documented. Peiris et al. (2012) highlighted that only four studies have

employed institutional theory in their theoretical frameworks for understanding the context

of international entrepreneurship (in our case, international entrepreneurial entry). The

institutional environment basically explains two sides of the coin, i.e., either it facilitates or

constrains various entrepreneurial aspirations, intentions and opportunities, which further


41

affects the speed and scope of new ventures’ international entrepreneurial entry into

foreign markets (Freixanet and Renart, 2020). Scholars have mostly discussed formal

institutions in the context of international entrepreneurship, leaving a gap to explore the

role of informal institutions (i.e., trust and control of corruption) in order to provide

descriptions of this phenomenon as well (Szyliowicz and Galvin, 2010).

Informal institutions are defined as values, norms and codes of conduct that are embedded

deeply in the culture of a society, and these cultural traditions impact the patterns of

various entrepreneurial actions. Further, Welter and Smallbone (2003) also emphasized

that these informal institutions, due to their property of being deeply embedded in society,

are quite resilient to change and at the same time slow down the process due to their path

dependence. In the study, we have assumed that various societal norms and values have a

significant role to play in the context of international entrepreneurship. This leads to our

research question, in which we examine how societal values, in our case trust and control

of corruption, which we defined as informal institutions, predict international


Following the introduction, the paper is structured as follows. First, a brief overview of

literature on social capital, international entrepreneurial entry, and informal institutions in

the context of new ventures is provided and hypotheses are listed. Secondly, the

methodology of the research is explained, and the results are presented, and finally the

article concludes with implications for the context of social capital and international

entrepreneurial entry and highlights that the value of informal institutions cannot be

overstated.

LITERATURE

Social Capital and International Entrepreneurial Entry

Generally, social capital can facilitate the entry of an entrepreneurial venture into the

international market and its success (Shahid, 2020; Granovetter, 1973). As firms initiate,

deepen and establish their contacts while in the process of internationalization, the activity

of an entrepreneurial firm can be viewed as developing and accessing social capital

(Johanson and Vahlne, 2006). Various scholars (Yli-Renko et al., 2002) have explained the

concept of social capital and highlighted that it is a significant contributor in a firm’s

acquisition of knowledge, market competitiveness and internationalization. Yet when

considering the significance of entrepreneurial orientation in the context of

internationalization, most firms suffer initially in achieving a better performance due to the

absence of a valuable resource like social capital (Hitt et al., 2001). The concept of social

capital is defined as “an aggregate of actual and potential resources possessed by the

entrepreneurial ventures from within their network of relationships” (Nahapiet and

Ghoshal, 1998) and has a significant role to play in the process of international


42

entrepreneurial entry (Chetty and Agndal, 2007). As ventures in their initial stages are

subjected to the liability of being small and new, it becomes difficult for them to survive

and move toward internationalization. Further, for new ventures one of the effective means

to develop internationally is through the acquisition of valuable resources available from

within the network of relationships (Jiang et al., 2018), instead of focusing on acquiring

resources through internationalization (Oviatt and McDougall, 1994).

In order to determine the extent of international entrepreneurial entry, access to

tacit knowledge is crucial (Vida, 2000), which in turn can be acquired from, within and

through the network of relationships. Further, entrepreneurial social capital also facilitates

in selecting the right market to enter and provides various suitable choices of entry mode

when small ventures plan for their international entrepreneurial entry. There is also a rapid

increase in accepting the influence of entrepreneurial social relationships on the

internationalization of small firms. In this context it has been found that specifically access

to external sources of social capital (i.e., buyer-supplier) has a significant role to play in

the process of exporting to the international market (Shahid, 2020; Bonaccorsi, 1992).

Therefore, access to the network of relationships facilitates new ventures in expanding

their social capital (Yan and Guan, 2018), and at the same time provision of indirect access

to resources facilitates in reducing the transaction costs incurred in case of exchange and

production (Chetty and Agndal, 2007). We postulate the following based on the

significance of social capital in the context of international entrepreneurial entry:

H1: Social capital and international entrepreneurial entry possess a positive link.

Figure 1 Research model

Social Capital, International Entrepreneurial Entry and Informal Institutions

Relatively well-grounded rules, community-based norms and cognitive structures explain

the institutional environment of a country (Scott, 1995), which further assists in defining


43

“rules of the game” (North, 1990: p. 1) in society. These institutions, in the form of

structural frameworks, shape the governance of making economic decisions and the

activities to be carried out in the marketplace (Szyliowicz and Galvin, 2010; Yeung, 2002).

Like any other economic activity, entrepreneurship has been discussed in light of both

formal institutions (rules and regulations) and informal institutions such as norms and

values (Baumol, 1990). Generally, entrepreneurs are indeed embedded in the institutional

environment and are the products of their socio-cultural environment (Jones and Conway,

2004). There is a mixed set of findings when it comes to deciding about international entry

in the varying institutional environment context; several studies have found that

international entry is negatively affected by the informal institutional environment (e.g.

Erramilli and Rao, 1993), while a few have found a positive relationship (e.g. Anand and

Delios, 1997), and a few others have found either a mixed (e.g. Chang and Rosenzweig,

2001) or insignificant (e.g. Luo, 2001) impact. But in the current study, we focused on

trust and control of corruption as components of the informal institutional environment that

have a positive impact on international entry. As scholars have also highlighted,

prevalence of a high level of trust in institutions and amenability with norms can further

lead to lowering the level of corruption in a society (Kay and Hagan, 2003; Tantardini and

Garcia-Zamor, 2015). Building on this point, we further explain our informal institutional

variables, i.e., trust and corruption, in detail below.

Trust

In recent years, there has been an increasing interest among entrepreneurship scholars in

studying the role played by trust (Hohmann and Welter, 2005; Welter and Smallbone,

2006), leading towards identifying the cause of its growing popularity in entrepreneurship.

Various studies have identified trust as a crucial component when it comes to starting new

businesses; this includes research on the relationship with business angels and venture

financiers (Maxwell and Levesque, 2011; Startling et al., 2011), franchising (Davies et al.,

2011), or the buyer-supplier relationship (Sengun and Nazli Wasti, 2009), and specifically

the role played by trust in the process of internationalization of new ventures (Fink and

Kessler, 2010). Some scholars see trust as an essential prerequisite for various enterprise-

related procedures such as information and communication technology adoption

(Beckinsale et al., 2011) and knowledge transfer (Lockett et al., 2008). Most of the time,

discussion related to trust in the context of entrepreneurship focuses on two major areas,

networks and social capital; Brunetto and Farr-Wharton (2007) mentioned these social

relations as being considered a proxy for personal trust. Some scholars (Anderson et al.,

2007; Kim and Aldrich, 2005) believe that trust renders support for social network

relations, whereas networks provide significant support in identifying and creating

opportunities (Jack and Anderson, 2002). Notably, in the internationalization of new

ventures, trustful relationships serve as a facilitator in maintaining and developing long-

lasting relationships (Rodrigues and Child, 2012). Further, these trust-centred relations are

helpful in reducing the transaction cost associated with monitoring and consultations


44

(Blomqvist et al., 2008). Various scholars (Brunetto and Farr-Wharton, 2007; Rodrigues

and Child, 2012) have mentioned considerable advantages associated with trust-based

relations; they provide motivation, relevant knowledge, underlying opportunities, and

protection against the associated risks of being small and new to the international market.

Situations where formal constraints are lacking or missing give rise to the significance of

informal institutions because in such a context, a specific segment and/or a particular

societal group is ignored by mainstream society. Informal social contacts have frequently

played a significant role by assisting entrepreneurs in various tasks such as managing

resources and by providing guidance through highly bureaucratic systems, for coping with

the various restrictions imposed by them (Ledeneva, 1998; Smallbone and Welter, 2001).

This further highlights the significance of social capital, which is embedded in informal

institutions, in order to enter the international market and for the subsequent expansion and

progress of a business. Further, the concept of new venture internationalization is broadly

understood by the theory of internationalization, which argues that the impact of various

social, economic and technological factors forces new firms to venture into the

international market immediately after their inception (Muralidharan and Phathak, 2017).

And firms under this model do not follow the gradual incremental process of

internationalization (McDougall and Oviatt, 2000).

From the perspective of McKeever, Anderson and Jack (2014), social capital has been

considered as an important influential factor in the context of entrepreneurship. Social

capital is characterized by various social contacts that allow entrepreneurs to cooperate

with other individuals in order to help their businesses to enter international markets. In

this viewpoint, the entrepreneurial context encompasses various resources and contacts

which are subjected to change while going through the various phases of entrepreneurial

processes, i.e., entering the international market will require a different level of contacts.

As initially it is difficult for entrepreneurs to predict which contacts and institutions will be

helpful for them, an informal institutional environment with a high level of trust will

reduce the uncertainties in contacts. Further, in the internationalization of a venture,

entrepreneurs are persistent in building trust and cooperation with their social contacts,

which also helps them in mobilizing various resources (Chetty and Agndal, 2007; Cheung,

2004; Oviatt and McDougall, 2005; Rodrigues and Child, 2012). We postulate the

following based on the relevance of trust as an informal institution in the interaction

between social capital and international entrepreneurial entry:

H2: Trust positively moderates the association between social capital and international


Control of Corruption

Corruption tends to appear in studies related to the societal institutional environmental

context (Tantardini and Garcia-Zamor, 2015). Inefficiency in institutions might affect

entrepreneurship (Douhan and Henrekson, 2010), including the informal factor of


45

corruption, which can affect the perception of an entrepreneur and his motivation for

establishing a new business. Furthermore, corruption favours strong established firms

which may take advantage of various public resources in order to increase their benefits; at

the same time, it creates hurdles for newly established businesses. Additionally, in

societies where individuals tend to move away from legal processes, it eventually gives

rise to illegal and unethical behaviour, and with the passage of time it becomes a normal

practice followed by individuals in general (Axelrod, 1986). In a similar context, this

behaviour further flourishes as a permanent social norm in society, forcing individuals to

opt for unlawful business practices as a normal way of getting their activities done (Paxton,

1999). On the contrary, control of corruption being analyzed as an informal institution

tends to improve entrepreneurs’ perception of the incentives associated with establishing

new businesses locally or internationally (Aparicio et al., 2016). So the point is that a large

amount of corruption control mechanisms is mostly present in developed countries as

opposed to developing countries (Siddiqui, 2019; Escandon-Barbosa, 2019). Further, the

importance of controlling this informal institutional factor of corruption can be seen in the

creation of new businesses with higher added value (Escandon-Barbosa, 2019).

Generally, it instinctively seems apparent that there exists a strong link between social

capital and corruption at the institutional level, explaining the scenario in which people

tend to be more honest when experiencing a lower level of corruption (Gorsira et al., 2018;

Bjørnskov, 2003), even though in research on social capital and control of corruption, the

direction of causality is less clear compared to studies related to their direct association.

Therefore, corruption is considered lower in a society where honesty and trust prevail and

vice versa (Paldam and Svendsen, 2002; Uslaner, 2001). Apart from the distortion in

individuals’ perception and the inefficiency in the bureaucratic governance structure

created by corruption (Méon and Sekkat, 2005), it can have some positive effects on

entrepreneurial activity (i.e., international entrepreneurial entry in our case) when it is

controlled (Alvarez and Urbano, 2011; Wennekers et al., 2005) by the governing

institutions. Further, one meta-analytic study specifically explained the moderating role of

control of corruption (Doucouliagos and Ulubasoglu, 2008) in the growth and development

of society (Kaufmann et al., 2008). Therefore, considering its positive aspects, control of

corruption in society will increase the likelihood of future entrepreneurs taking a larger

portion of the revenues they generate, which will further motivate them to carry out better

international entrepreneurial entry (Alvarez and Urbano, 2011). Therefore, it stands to

reason that an improvement in corruption control should have a greater impact in a

situation where corruption is high than where it is low (Anokhin and Schulze, 2009). We

postulate the following based on the relevance of corruption control as an informal

institution in the interaction between social capital and international entrepreneurial entry:

H3: Control of corruption positively moderates the association between social capital and

international entrepreneurial entry.


46

METHODOLOGY

In our study the theoretical framework consists of two main levels: an individual level and

a country level. This is also depicted in Figure 1. We tested the three hypotheses related to

social capital and its effect on international entrepreneurial entry with the moderating role

of informal institutional variables in combination, which makes our theoretical framework

a multi-design model. The Global Entrepreneurship Monitor’s adult population survey

(APS), which provides data that is reliable, valid and rich (Shahid, 2020; Reynolds et al.,

2005), was used for conducting cross-country research, to observe the behaviour of an

entrepreneur at an individual level, i.e., social capital and international entrepreneurial

entry. GEM provides significant data on social capital and foreign market entry in an adult

population survey, and we used data from 2002-2013 for our study which is also publicly

available on its official website (www.gemconsortium.org). The Global Entrepreneurship

Monitor initiative began in the late 1990s with a goal of gathering individual-level (APS)

data from various nations around the world and it is now made available to the public

every year (Bosma, 2013). Each country is represented by a sample of at least 2000 people

(aged 18 to 64) who are interviewed by phone or in person on a regular basis. International

entrepreneurship research mainly relies on GEM due to the depth and richness of its data

(Bowen and De Clercq, 2008; McMullen et al., 2008; Elam and Terjesen, 2010).

For our informal institutional variables at the country level, the data for trust is taken from

the World Values Survey (WVS) over the period of 2002 to 2013, which is covered in

wave 4 to wave 6. And further, the data for control of corruption is taken from World

Governance Indicators (WGI), a project of the World Bank (World Bank, 2004; 2007).

Further, we merged the individual-level data with the country-level data, which provided

482,257 observations and covered 44 countries from 2002 to 2013. Details of mean values

for each participating country are provided in Table 1. More importantly, the overall data

is anchored by GEM in such a way that if relevant data for individual-level variables is

available for a particular country in a particular year in GEM, then the data is gathered for

country-level variables, i.e., control of corruption and trust, from WGI and WVS sources

respectively for the same country in a particular year as well.

Individual-level Dependent Variable International Entrepreneurial Entry

International entrepreneurial entry is employed as the dependent variable in the study, with

the early-stage entrepreneur being asked “to estimate the proportion of clients who live

outside his/her country” (Muralitharan and Pathak, 2017; Shahid, 2020).


47

Table 1

Descriptive Statistics

N Mini-

mum

Maxi-

mum

Mean Std.

Deviation

International

entry

482257 .00 1.00 .0395 .19473

Social capital 482257 -2 1 .37 .490

Age 482257 18 64 40.59 12.656

Gender 482257 1 2 1.50 .500

Education 482257 -2 1720 943.58 603.390

Income 482257 1 3 2.05 .808

Trust 44 4.1 73.7 23.836 14.3881

Control of

corruption

44 -1.132 2.552 0.772 0.938

GDP per

capita_ppp

44 2998 77429 26026.30 12345.035

Zscore (GDP

growth)

44 -1.48339 3.94606 -.1384008 .94336885

Population_tot

al

44 3331043 1350695000 107143851.78 229250407.073

Population

growth (%)

44 -98.926 12539.257 1212.632 2451.845

GEM classifies entrepreneurs into three broad categories. The first category comprises

“nascent entrepreneurs”, which includes those individuals who are in the process of

making an attempt to start a business (i.e., in the conception stage) and have expectations

of full or part-time ownership. The second category comprises “new entrepreneurs”, who

are defined as “startup owner/managers who have paid wages for 3 to 42 months”. Finally,

the third category comprises “established entrepreneurs”, who are defined as

“individuals who have been in a company for more than 42 months and have paid wages”.

According to the TEA (Total Entrepreneurial Activity), we focused on the early-stage

entrepreneur index (as nascent and new entrepreneurs) involved in a significant amount of

foreign trade. We explicitly measured foreign entrepreneurial entry as whether at least 25%

of their customers were located overseas (Shahid, 2020; Chen et al., 2018). Only those

businesses with at least a quarter of their customers residing overseas (i.e., 25%) were

chosen.


48

Country-level Predictor Variable Informal Institutions (Trust and Control of

Corruption)

Previously, various studies have used trust and control of corruption at the country level

(Alvarez and Urbano, 2011; Anokhin and Schulze, 2009; Hohmann and Welter, 2005;

Welter and Smallbone, 2006), and mainly two informal institutional variables, i.e., trust

and control of corruption at the country level, are used in our study as well. The data for

trust is obtained from the WVS over the period of 2001 to 2013. In order to measure the

variable trust, WVS uses the following question: “Generally speaking, would you say that

most people can be trusted or that you need to be very careful in dealing with people?”

Further, control of corruption data has been extracted from the outlet of Worldwide

Governance Indicators (WGI), which is a project of the World Bank (Kaufmann et al.,

2008; World Bank, 2004; 2007). The WGI data is based on 31 diverse sources provided by

25 different organizations and, therefore, it characterizes the broader scope of diverse

stakeholders. In the analysis all the scores range within a negative score of 2.5 (low

control) and a positive score of 2.5 (high control), where higher scores indicate a better

outcome of the corresponding institution. In the study, control of corruption apprehends

the degree to which a public authority is being utilized for gaining private advantage as

well as creating conditions for privileged and private interests (Alvarez and Urbano, 2011).

Individual-level Independent Variable Social Capital

The data for social capital and international entrepreneurial entry was estimated at the

individual level using data from the Global Entrepreneurship Monitor (GEM) adult

population survey (APS) database and the countries were chosen accordingly; additionally,

a cross-sectional panel dataset was used in the study. In the GEM adult population survey

each participating country interviews a randomly selected sample of people aged 18 to 64.

GEM asks entrepreneurs the following question to assess social capital: “Do you know

anyone personally who has established a business in the last two years?” (Global

Entrepreneurship Research, 2013). During the period of 2002-2013 entrepreneurs in our

sample of 482,257 indicated the presence of experienced individuals they know personally

from 44 different countries.

Control Variables

The study included a range of control variables at both the individual and country levels,

which have previously been identified as the major antecedents for performing multi-level

research in in the setting of institutions and behaviour (Boudreaux et al., 2019; Raza et al.,

2018; Schott and Sedaghat, 2014). Individual-level control variables included age, gender,

education and household income, which have been utilized extensively in cross-country

entrepreneurship studies (Estrin et al., 2013; Lloyd-Reason and Mughan, 2002; Van Stel et

al., 2007). Entrepreneur’s age was used as a continuous variable from 18 to 64 years old;


49

next, the variable gender was used as a dichotomous variable representing 1=male and

0=female; education was controlled as a five-step categorical scale with none =0, some

secondary=1, secondary=2, post-secondary=3, and graduate experience=4; finally,

household income was divided into three categories: low average=1, average=2, above

average=3. Taking into account the literature on the country’s economic development level

and several indices of entrepreneurial behaviour (Boudreaux et al., 2019), we used GDP

per capita, GDP growth, population and population growth from the World Bank data

collection as our control variables at the country level.

RESULTS

Here we keep in view the aim of the present study, which is to develop a better

understanding of the informal institutional factors corruption, taken from World

Governance Indicators (WGI), and trust, taken from the World Value Survey (WVS), at

the country level, influencing the relationship between entrepreneurial ventures’ social

capital and their ability to reach the foreign market. Table 1 depicts a summary of sample

descriptives of the study. Tables 2a and 2b further depict the matrix of correlation for the

predictors at the individual level and the country level and also the controls utilized in the

study. And finally, Table 3 shows the regression results from our research.

Table 3 depicts the random effect logistic regression models for new ventures’ foreign

entrepreneurial entry. In order to examine our hypothesis, a three-step strategy was

adopted. In order to assess the fraction of explained variance, we first included all control

variables present at both the individual and country levels. All of the predictors were

introduced in the next phase so that their influence on international entrepreneurial entry

could be estimated (see Table 3, Column 2). Finally, in the last step each interactional term

for the institutional (country-level) dimension was included (see Table 3, Column 3 and

Column 4). The interaction was carried out by multiplying the institutional indicators at the

country level, i.e., trust and control of corruption respectively; two interaction terms for

international entrepreneurial entry were created using individual-level social capital.

Table 3 (Column 1 and 2) shows the results of odd ratios (OR), which explain the

phenomena as follows: OR>1 depicts a positive relationship and OR<1 depicts a negative

relationship. Further, Table 3 (Column 3 and Column 4) reports the odd ratios in order to

explain logistic regressions’ mixed effects. People with a high level of social capital

(OR>2.91) represent entrepreneurs who are more likely to enter the international market

compared to those who possess a low level of social capital, and H1 (individual-level

hypothesis) is supported, stating that social capital possessed by an entrepreneur and

international entrepreneurial entry have a significant positive association.

Finally, to investigate hypothesis H2 and hypothesis H3, two cross-level moderation

effects were introduced between a) social capital and trust and b) social capital and control


50

of corruption (Table 3, Column 3 and Column 4). The findings depicted in Table 3 for the

moderating role performed through the interaction between a) social capital and trust

(OR=1.14; p<0.02) and b) social capital and control of corruption (OR=1.13; p<0.02)

reveal a positive and significant relationship, which provides support to our hypothesis H2

and hypothesis H3, respectively.

CONCLUSION

1. In the current study, investigation is carried out specifically emphasizing the role

of trust and control of corruption in the context of social capital and international

entrepreneurship. The study explains that entrepreneurs with strong social capital

in a society with a better control of corruption and greater level of trust will be

associated with a higher level of international entrepreneurial entry. Generally, it is

argued that, along with the transaction costs and various other unproductive

consequences of corruption, a low level of trust in the corrupt environment limits

the scale and scope of economic activity (Wintrobe, 1995) and therefore leads to a

reduction in the incentives for the entrepreneur to pursue international activity (i.e.,

international entrepreneurial entry).

2. Within the institutional context, policy-makers have mainly concentrated their

attention on studying formal institutional factors, which are not sufficient to

analyze international entrepreneurial activity (Stephan and Uhlaner, 2010); there is

a need to study the other side of institutional environmental factors, which are

defined as informal institutions. Therefore, the findings of our study have

implications for policy-makers concerned with supporting early international

entrepreneurial entry by exerting influence on informal institutions. Typically,

these informal institutions are subjected to change slowly over a period of time

(Estrin et al., 2012) and, due to their rigidity and strong embeddedness, are

difficult to alter as well. International entrepreneurial entry, as a key factor of

economic growth (e.g., Schumpeter, 1934), requires policies that can remedy the

missing norms hampering various entrepreneurial outcomes. Many governments

are establishing various plans that are aimed at encouraging early international

entrepreneurial entry, e.g., the National Science Foundation in the USA, by

encouraging young entrepreneurs to carry out feasible business ventures.

3. The present study has focused attention on describing the trend of international

entrepreneurial entry across various countries using data from GEM, but in the

future, a study could be conducted to examine the phenomenon of home and host

country or the developing and developed country context, since the level of trust,

control of corruption and various other informal institutional factors may also

fluctuate with a country’s level of economic development. Further, entering the

foreign market entails a complete set of processes that are divided into the early

stage or introduction phase, the growth phase, and the breakout phase (Gabrielsson

et al., 2008); therefore, future research could focus on studying the informal


51

institutional context to observe whether international entrepreneurial entry is

affected differently.

4. Finally, the study opens an avenue to examine effects of the informal institutional

context on the international entrepreneurial entry of new ventures. The formal

institutional context has already received a lot of attention from scholars, but the

informal institutional context has been studied less so far and, specifically,

empirical evidence is quite scarce (Muralidharan and Pathak, 2017). The study

contributes to stating the positive effects of informal institutions on international

entrepreneurial entry within the context of social capital possessed by

entrepreneurs.

Table 2a

Correlation matrix – individual-level correlations

1 2 3 4 5 6

International entry 1

Age -0.042 1

Gender -0.040 0.012 1 Income 0.057 -0.020 -0.093 1

Education 0.057 -0.134 -0.022 0.218 1

Social capital 0.114 -0.123 -0.097 0.109 0.083 1

Table 2b

Correlation matrix – country-level correlations

1 2 3 4 5 6 7

International entry 1

GDP -0.015 1

GDP growth -0.013 0.947 1

Population -0.014 -0.265 -0.231 1

Population growth -0.043 -0.313 -0.242 0.670 1

Trust -0.018 0.554 0.601 0.275 -0.019 1

Corruption -0.001 0.815 0.837 -0.302 -0.295 0.487 1


52


53


54

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DOI: 10.32025/JBM19003

The challenges of cybersecurity

insurance development: The case of

Latvia

TATJANA VOLKOVA

LINDA JEKABSONE

ZITA LAVRINOVICA

ELINA SABA

MARIS SABA

ABSTRACT

Purpose. This paper aims to provide an overview of the current challenges of cybersecurity

insurance, focusing on the identification of development constraints and opportunities and the key

impact factors of this recently emerging insurance market in Latvia.

Methodology. The authors used theoretical and empirical research methods, e.g., a literature

review, surveys of experts from principal insurance companies and professionals from prominent

mobile network operators, and interviews with experts in cybersecurity and pioneers of

cybersecurity insurance in Latvia.

Findings. The research results illustrate the immense difficulties in providing cyber risk insurance

in Latvia. The lack of historical knowledge and evolving nature of cyber risks create significant

challenges in quantifying and expressing cyber threats in monetary value. Cyber risk modelling is in

its infancy, as events and threat vectors are still evolving. Due to the evolving nature of cyber risks,

simulating events and fitting into traditional risk management forms are the primary challenges for

insurance companies. Despite the increasing relevance of cyber risks to businesses, research on

guidelines and methods of mitigating cyber risks with cyber insurance is still limited.

Social implications. Cyber insurance is a direct result of public awareness of cyber threats and

preparedness to mitigate business risks. Thus, cyber insurance is an integral part of educating and

building a more resilient society.


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Originality/Value. The authors propose various approaches to cybersecurity insurance

development, such as technology awareness building, standardization of mandatory reporting

requirements and public–private partnerships in which the government covers part of the risk to

overcome insurability limitations.

Keywords: cyber insurance, cybersecurity, cyber insurance market, cyber risks

INTRODUCTION

With the increasing importance of information technology (IT) in the business and public

sectors, there has been a growing impact of cybersecurity threats, i.e., their effect on these

sectors’ processes. One of the ways to mitigate cybersecurity risks is cybersecurity

insurance.

There is no common understanding regarding the essence of cybersecurity insurance.

According to Matthew, cybersecurity insurance is an insurance product which is used in

protecting businesses as well as individual users from information technology-based risks

(Matthew, 2019). Sometimes referred to as cyber liability or cyber risk insurance, its

definition has evolved considerably due to new emerging cyber threats. Initially there was

a focus on media and software risks, especially banking, and this expanded to network

security, unauthorized access, data loss and other virus-related issue coverages (Matthew,

2019). Later cybersecurity insurance also included first-party (relates to loss directly

suffered by the insured) and third-party (relates to claims brought by parties external to the

contract) coverages, still excluding regulatory claims and fines and penalties (Romanovsky

et al., 2019). With the expansion of the Internet of things, cybersecurity insurance includes

further contemporary items and issues. Even with the negative worldwide influence of

COVID-19 on economic development, the global cybersecurity insurance market forecast

is estimated to grow at a CAGR of 21.2% from USD 7.8 billion in 2020 to USD 20.4

billion in 2025 (Research and Markets, 2020).

Latvia as a research object in this relationship between growing IT business, cybersecurity

risks and cybersecurity insurance is particularly appealing. Firstly, Latvia is still in the

process of integrating into the market economy regarding new services and products that

have been around in the Western world for a considerable time. Secondly, information and

communication technologies play an important and especially growing role in the Latvian

economy – in the last quarter of 2019, this sector shared 5.16% of the whole economy

(Central Statistics Bureau, 2020). These results exclude other sectors that are highly

dependent on IT: energy, banking, manufacturing, logistics and others. This paper aims to

provide an overview of the current situation of cybersecurity insurance, identifying

challenges in this recently emerging insurance market in Latvia.

This paper consists of four parts. The authors will start with analysing theoretical literature

regarding the costs of cyber threats and cybersecurity insurance. Further on, the research


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design and methodology will explain how observance of cybersecurity insurance in Latvia

was conducted, and this will be followed by presentation and analysis of the research

results. Finally, concluding remarks will close this study.

LITERATURE REVIEW

Cybersecurity insurance is still an evolving subject of research and, therefore, is

experiencing harsh debates regarding its definition. Besides the previously mentioned

perspective from Matthew, Romanovsky, Ablon, Kuhn and Jones state that “cyber

insurance addresses first and third-party losses as a result of a computer-based attack or

malfunction of a firm’s information technology systems” (Romanovsky et al., 2019).

These two definitions show the gaps in comprehension of cybersecurity insurance, for

example, what exact risks are included and excluded and whether private customers can

attain such insurance coverage. In addition to these researchers (Romanovsky, Anderson,

Matthew and others), major contributors to the research field include private think tanks

such as FICO and public entities such as governments (the UK is an outstanding example

of interconnectivity between insurance brokers and the government) and international

organizations (the EU, OECD and others).

Regardless of the definition, an integral part of cybersecurity insurance is estimating the

cost of cybercrime – it has to be damaging enough for anyone to be willing to give up part

of their income to mitigate the risk. The European Commission’s 2007 Communication

“Towards a general policy on the fight against cybercrime” has proposed a threefold

definition for the cost of cybercrime:

1. Traditional forms of crime such as fraud or forgery, though committed over

electronic communication networks and information systems (direct losses)

2. The publication of illegal content over electronic media (cost to society)

3. Crimes unique to electronic networks such as attacks against information systems,

denial of service and hacking (defence costs) (OECD, 2017)

Anderson and others have worked on research to investigate the nature and size of the top-

ranking cybercrime costs of today, especially since 2012, when the last such report was

made (Anderson et al., 2019). The following figures give an impression of how valuable

the cybercrime industry is and how appealing it makes cybersecurity insurance as a risk

effect mitigation tool (see Table 1).


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Table 1

Cybercrime types and the value of damage, million, billion £ and USD (2012-2018)

Crime Type Value of Damage

Online credit card fraud £731.8 million (UK)

Online bank fraud £121.4 million (UK)

Authorized push payments £236 million (UK)

In-person card fraud £158 million (UK)

Ransomware Over $10 million (US)

Cryptocrime $2 billion (US)

Ad fraud $1-9 billion (US)

Pharmaceuticals Tens of millions of $ (US)

Coupon fraud $300m+ (US)

Loyalty-programme fraud $235 million (US)

Travel fraud $1 billion (US)

Counterfeit software $1-9 million (US)

Copyright theft $10 million (US)

Fake antivirus $7.1 million (US)

Tech support scams $39 million (US)

Compromised email Regulatory and legal costs

Fake companies Tens of millions of $ (US)

Advance fee fraud $ 100 million (US)

Business email compromise $1.3 billion (US)

Telecoms fraud $7 billion (US)

Wanacry/NotPetya $1-2 billion (US)

Fiscal fraud $1-9 billion (US)

Romance scams $143 million (US)

Source: Anderson et al., 2019

Determining cybersecurity crime type and value of damage is only part of implementing

cybersecurity insurance as a means to mitigate information technology-related risks.

Cybersecurity insurance, just like any other insurance business, has to be economically

viable. In order to accomplish this, according to Insurance Europe, certain principles of

insurability have to be met: risks must occur randomly, risks must be quantifiable, and a

sufficiently large community with assets at risk can be established to share the risk

(OECD, 2017). When these criteria are achieved, the creation of an insurance policy can

happen – an interaction between demand, supply and cyberspace-related factors.

The OECD points out two factors that have the greatest effect on cybersecurity insurance

policy price: first, the difficulty in quantifying a relatively new and evolving risk; second,

the potential for significant correlation across insureds, also known as an accumulation risk

(OECD, 2017). According to the CRO Forum, quantifiability of cyber risk as a shortfall for

the cybersecurity insurance business is mostly due to limited availability of historic data,

the changing nature of cyber risk and the lack of transparency about security practices and


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past incidents in the corporate world (OECD, 2017). The organization points out that in the

case of a cyber risk, there is a huge potential for losses to be correlated across insureds and

across various types of coverages provided to a single insured (OECD, 2017).

Accumulation risk is therefore due to high levels of interconnectivity – common software

vulnerability, information technology service disruptions and critical infrastructure

damage.

From potential customers’ perspective, according to the OECD, willingness to demand and

pay for cybersecurity insurance as a product is most likely affected by a lack of awareness

of potential losses from cyber risk, misunderstandings about the need for coverage as well

as a potential mismatch between what companies are seeking and the coverage offered –

77% of companies interviewed in the UK in 2016 stated that coverage only partially met

their needs, indicating reputational damage and intellectual property theft as the most

concerning risks they would like to be covered (OECD, 2017).

Despite the limiting and developing factors of the cybersecurity insurance market, it

doubled in the time period between 2015 and 2018, reaching an estimated $4 billion in

premiums (Anderson et al., 2019). In a similar 2018 report by NetDiligence, the

conclusion was that one third of pay-outs are for legal costs such as defence lawyers and

settlements; this information has to be considered when calculating total cybersecurity

insurance costs (NetDiligence, 2018). An important role in the development of

cybersecurity insurance is played by data providers that offer risk assessment to

organizations seeking insurance and underwriters, such as Bitsight, Security Scorecard and

QuadMetrics (Anderson et al., 2019).

When looking at the Western European market for cybersecurity insurance, the trend is

similar. According to a FICO 2017 survey covering 11 countries (from Europe – the UK,

Norway, Sweden, Finland and Germany) and 500 companies, the UK leads with 90% of

companies having cybersecurity insurance and 37% covering the most likely cybersecurity

risks (FICO, 2018). The Nordic countries are not far behind with 76% of Finnish

companies, 72% of Norwegian companies and 57% of Swedish companies being

cybersecurity insured (FICO, 2018). This survey also reflects Nordic cyberspace’s profile

– 65% of organizations expected an increase in cyber risks, 41% of organizations

experienced an increase in attempted cyber breaches, more than half of organizations were

expecting a budget increase for their cybersecurity, 34% of organizations have privacy

regulations as the biggest influencing factor in cybersecurity strategy (32% – pressure from

customers and investors, 20% – an increase in cyberattacks) and 80% of organizations

expect the cybersecurity risk to come from their own ranks, not third-party vendors (FICO,

2018). When analyzing cybersecurity insurance trends across Europe, it is essential to

observe the UK. According to a report compiled by the British government in conjunction

with Marsh in 2015, the cabinet helped the insurance industry to establish cybersecurity

insurance as part of organizations’ cybersecurity toolkit by developing a guide on

cybersecurity insurance and organizing a data, threat and trend-pooling public forum

without revealing anyone’s identity (Marsh, 2015). The British example shows that


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governmental support is essential in the early developmental stages of cybersecurity

insurance.

METHODOLOGY

The main goal of the research is to provide an overview of the current challenges of

cybersecurity insurance, focusing on the identification of development constraints and

opportunities and the key impact factors of this recently emerging insurance market in

Latvia. The research combined qualitative and quantitative methods for exploring and

understanding the defined problem statement. In the framework of this research the authors

conducted a semi-structured interview with a representative from the Latvian cybersecurity

industry and a survey of Latvian insurance companies and Latvian mobile operators in

order to understand why cybersecurity insurance is not widely offered on the Latvian

market.

Survey of insurance companies

The research team identified 10 principal non-life insurance companies in Latvia: “Balta”,

“Baltijas Apdrosinasanas Nams”, “BTA Baltic Insurance Company”, “Compensa Vienna

Insurance Group ADB Latvian branch”, “ERGO Insurance SE Latvian branch”, “ADB

“Gjensidige” Latvian branch”, “If PandC Insurance AS Latvian branch”, “Seesam

Insurance AS Latvia branch”, “Swedbank PandC Insurance AS Latvian branch”, and

“Balcia Insurance SE”. 8 of them are members of the Latvian Insurers Association. The

insurance companies were selected according to their expertise at the international level

and current exposure in the Latvian insurance market.

Of the ten companies approached, six agreed to the survey, making the response rate 60%.

The representatives who answered the questions and shared their experience are managers

of various levels or representatives of product development departments, such as Corporate

Property Insurance Products Manager; Product Manager; Head of the Commercial

Products, Pricing and Risk Underwriting Department; and Head of the Latvian Branch. All

companies participating in the survey have already analyzed the inclusion of cybersecurity

insurance in their product portfolio.

The authors developed a questionnaire based on the literature review, posing 8 qualitative

questions. The survey was conducted in February 2020.

The authors focused on understanding the development of the cybersecurity insurance

market. The core research questions were: Has the insurer seen an increase in demand for

cybersecurity insurance products from companies in the last 2-3 years? What are the key

impact factors influencing the cybersecurity insurance service offer? What are/would


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insurance companies consider as contributing factors to the cybersecurity insurance service

offer?

Interview with an expert

The research team initiated the research with a face-to-face interview with the

Chief Executive Officer (CEO) of Latvian insurance company X, which offers up-

to-date high-end insurance solutions, including cybersecurity insurance. At the time

of the study, the number of cybersecurity insurance policies issued by Latvian

insurers was not large and this segment of the business was just beginning to grow.

The expert of company X was selected because this company had issued several

cybersecurity insurance policies; accordingly, this was the company with the

largest experience of where such risks are located. An interview was conducted in

January 2020 in order to find out how long the company had been offering

cybersecurity insurance services in Latvia, whether this was popular amongst

Latvian entrepreneurs, what restrictions and limitations they were facing and what

the company’s vision for the future was, including forecasts for the growth in

popularity of cyber insurance products. The interview was based on experience and

opinion and provides a general idea plus a realistic view of the contemporary

expert on current issues regarding cybersecurity insurance from different

perspectives: demand, supply, hindrances, and general understanding.

Surveys of Latvian mobile operators

The research team identified all the mobile operator companies operating in Latvia over

the last five-year period. The authors sent the questionnaire to the following 3 mobile

operators operating in Latvia: “LMT”, “BITE Latvija”, and “Tele2”. At the time of this

research, the leader of the Latvian mobile communication market was “LMT” with a 45%

market share, followed by “Tele2” with 33% of the market and “BITE Latvija” with a 22%

market share according to a Public Utilities Commission report. One representative from

each company was selected according to 2 criteria: executive or mid-level management

position and direct involvement in the company’s cybersecurity management. A response

was received from all 3 company representatives, making the response rate 100%.

The mobile communication industry as a possible cybersecurity insurance buyer was

chosen because their services largely depend on IT, are widely recognized, have a brand,

have a large customer base, hold comprehensive customer data, and have an IT

infrastructure critical to their business. All these business conditions make them an

appealing target for cyberattacks. Large companies have done a lot to make themselves

cyber-secure, yet some risks remain, including through their exposure from third parties,


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service providers, product suppliers or customers (Marsh, 2015). But it should be noted

that not just business giants are vulnerable to destructive cyberattacks. It is the data, not the

size of the company, that makes a business attractive to cyber criminals, especially data

such as customer contact information, credit card data, health data, or valuable intellectual

property (Armerding, 2015).

The research team developed a questionnaire about cyber insurance based on the literature

review. According to Marsh Ltd. research, the potential losses from cybersecurity incidents

and cyberattacks fall into the following 11 loss categories: intellectual property theft,

business interruption, data and software loss, cyber extortion, cybercrime/cyber fraud,

breach of privacy events, network failure liabilities, impact on reputation, physical asset

damage, death and bodily injury, and incident investigation and response costs (Marsh,

2015). The questionnaire focuses on malicious attacks because of the much greater damage

they can cause compared to non-malicious attacks. The research team approached mobile

operators operating in Latvia with questions based on these loss categories as well as

questions about their general interest in acquiring a cybersecurity insurance policy.

Asking about different loss categories shows the extent to which cyber risk deserves to be

considered and that it is much greater than the current focus on data breaches, which

companies these days seem to understand as the biggest threat. This categorization also

recognizes that the impact of the attack may be felt well beyond the organization affected.

Companies should also consider the impact a cyberattack on a supplier or other third party

could have on their own business. In the questionnaire the mobile operator representatives

were asked to explain whether they would be interested in insuring their company and

which of the loss categories they would most likely be interested in having covered in an

insurance policy. The questionnaire focused on cyberattacks and malicious IT failures,

since malware and web-based attacks continue to be the most expensive according to

Accenture research (Accenture, 2019). The survey was conducted in February 2020.

RESULTS AND DISCUSSION

Results of the interviews with insurance companies

The research results illustrate the immense difficulties and significant challenges in

providing cybersecurity insurance. The importance of cybersecurity, at both the corporate

and national level, is only growing (Ministry of Defence of the Republic of Latvia, 2019).

Cyber risks are not avoidable, but they must be manageable; therefore, the authors

emphasize the need to continue working on this topic. The National Cyber Security Index

of Latvia is still the lowest in the Baltic states (NCSI, 2019).

The research recommendations and observations aim to highlight the shortcomings of the

development of the cybersecurity insurance market, emphasizing that an integrated

approach is needed to address them. The authors propose that the principal insurance


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companies need to create a structured dialogue to highlight a harmonized framework and

the main directions in developing the cybersecurity insurance market. Cooperation

between the principal insurance companies would expedite the development of the

cybersecurity insurance market, but as this is a competition issue, the possibility of

applying such an approach is restricted.

Overall, the outcome of this research of the principal insurance companies provides useful

insights on the growth potential, challenges and significant concerns of cybersecurity

insurance in Latvia. Respondents of all levels emphasized their main concerns about the

current cybersecurity insurance market and highlighted areas for further research and

analysis. At the same time, the authors note that there is no clear and harmonized

terminology among insurance companies for cybersecurity insurance. Moreover, there are

limitations in insurance companies regarding sufficient technically skilled

underwriters/brokers to build in-house expertise, which is one of the key findings. One

factor that drives the complexity of the underwriting process is that cyber insurance is not a

bulk product but is highly tailored to each customer (Franke, 2017).

The key findings from the survey of insurance companies’ representatives are shown in

Figure 1:

Figure 1 The sum of representatives’ evaluations of the key findings on a scale of 1 to

8 (1 – lower importance, 8 – higher importance)

Source: survey conducted by the authors

The research highlights a need for an increased awareness of cyber risk on the supply and

demand side. Cyber risk is a dynamic risk category that has substantially evolved over

time; also, the protective processes and systems are fundamentally evolving (Eling et al.,

2019). Lack of understanding by clients of their own risks related to cybersecurity is

defined as the main key finding of the survey. Therefore, the key success factor for

enhancing cybersecurity insurance development from the authors’ point of view is

commonly agreed terminology among insurance industry representatives around


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cybersecurity insurance key terms. This is also one of the preconditions for establishing

common procedures and standards, without which a successfully functioning cybersecurity

insurance market is not possible. However, the authors consider that insurance companies

need to play a critical role in helping other companies understand potential consequences

of cyberattacks and identify insurable cyber risks to increase overall company awareness

of cybersecurity, in the form of seminars, educational materials, and conferences.

Cyber risk measurement and management is a challenge for insurance companies (Ruan,

2017). The authors agree that, by nature, a cybersecurity insurance product is a very

complex type of insurance, in terms of both indemnification and regulation. Indeed, proper

assessment and quantification of an organization’s security situation is something that the

information security industry has been struggling with for decades and which, to this day,

remains elusive (Romanosky et al., 2019). All the respondents share the same opinion that

the intangible and pervasive nature of cyber risks and their remodelling into traditional risk

management forms and applying appropriate insurance coverage pricing are the primary

challenges for insurance companies. The authors consider that international experience of

insurance companies must be used to adapt risk management forms already in use.

Insurance companies consider business liability coverage for a data breach as the most

necessary category of cybersecurity insurance for businesses. At the same time,

respondents of all levels were eager to point out that insurance policies could not be

standardized but must be custom-based and tailored to the business of a particular

company. This means that coverage and terms would vary (Bodin et al., 2018). The

authors highlight it as one of cybersecurity insurance’s limitations, as custom-based

policies require additional time and work from the insurance companies’ side.

Very low customer demand, an average of 1-2 applications per year, compared with the

possible high cost of risk assessment and valuation from the insurers’ side, is not

facilitating the cybersecurity insurance offer currently, but at the same time, insurance

companies expect a gradual increase in the demand for cybersecurity insurance, mainly

driven by increased awareness of risks and by a higher frequency of cyber events. The

impact of cybersecurity breaches is often not visible materially, which prevents their

impact from being assessed in a sufficiently transparent manner from the outset. The

respondents admitted that there is a very high possibility that customers who do not

already understand the need for the simplest types of insurance for their business will not

be motivated to spend financial resources on a cybersecurity insurance product,

speculating that the occurrence of risks defined in the policy is impossible. The authors

consider that demand is low due to the fact that insurance can defray only some of the

costs of a data breach. As respondents also highlighted in the surveys, even the most

comprehensive insurance policies will not ensure full coverage for a business, as provision

of cybersecurity requires a strong security culture in companies.

While some insurance companies observe a potential for growth, they still prefer to adopt a

careful approach in light of the uncertainties surrounding cyber risk, ranging from

difficulties in risk modelling and prediction to adequate cost-effective pricing. There are


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many different processes influencing cybersecurity-related decisions inside a company.

There are also many different factors, both internal and external, that can influence

companies’ cybersecurity decision-making and cyber insurance adoption (Labunets et al.,

2020). Data and quantitative tools are key obstacles to the development of the cyber

insurance industry. Insurers mentioned that lack of data (lack of sufficient amounts of

claims data) is an important obstacle to a detailed understanding of fundamental aspects of

cyber risk to build adequate models to assure accuracy in risk management. Organizations

are wary of releasing too much information about their internal systems to prevent a

decrease in reputation as well as leakage of knowledge about weaknesses of the system

(Marotta et al., 2017).

From the authors’ point of view, effective risk management is essential for success in

enhancing cybersecurity insurance development and needs the involvement of the entire

insurance industry, associations and the government to maximize data availability.

The authors consider that an important success factor driving cybersecurity insurance is

emphasizing the cybersecurity insurance topic and its importance at the governmental

level. A strong majority of insurance companies have confirmed that the government

should play an important role in fostering good cybersecurity practices by strengthening

cybersecurity strategy and in supporting the cybersecurity insurance market through

policies and regulation.

From the authors’ perspective, if there is no stable supply from the insurance companies’

side for cybersecurity insurance products, new players could enter the market such as start-

ups, which on the one hand could be potential partners, but on the other could be treated as

competitors and might overtake this insurance industry segment.

Expert interview analysis

With the development of modern technology, cyberattacks have become an integral part of

the business world, and the fight against these attacks has become a major challenge for

many companies. The questions addressed in the interview with the CEO of a Latvian

insurance company were as follows: How does one choose an appropriate protection

system to help fight against them? Is cyber risk insurance a solution to protect a company

from paralysis and cybercrime losses? Do companies in Latvia see a need for cybersecurity

insurance, and are insurance companies in Latvia ready for it? In order to objectively

assess the influencing factors related to cybersecurity insurance, the expert was mainly

asked to speak about challenges and practical experience in implementing this product for

more than five years.

The expert clarified that the company does not develop cybersecurity insurance products

but finds appropriate solutions for the client. The company has been offering such a

service, and he emphasizes that interest is gradually growing. Based on the expert

interview it can be concluded that one of the primary caveats for an effective insurance


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product is a thorough understanding of the risk faced by policyholders. The biggest interest

in cybersecurity insurance products is from the financial sector and companies with large

databases, companies whose business depends on technology, and technology service

providers. The main impact factors mentioned are the lack of public awareness of the

importance of data and the possible consequences of cyberattacks. Simultaneously, the

expert highlights that it is important to understand that cybersecurity insurance does not

guarantee a reduction in the number of incidents but is only an additional safety pillow.

One of the factors promoting the introduction of such a service is the need to educate the

public more and talk about cyber protection measures and their need at the national level.

As an impediment, the expert mentions insufficient understanding of cybersecurity

insurance and capacity among insurers and the relatively small size of the Latvian market,

as well as the lack of real claims and litigation against companies, for example, for stolen

data. From the expert’s point of view, it will be five to ten years before cybersecurity

insurance becomes more popular in Latvia.

Latvian mobile operator survey results

At the start of the questionnaire, all representatives of Latvian mobile operators were asked

to rank in order of importance what they consider to be the greatest cybersecurity risks for

their company (see Figure 2).

Figure 2 The sum of representatives’ evaluations of the cybersecurity risks on a scale of 1 to 10

(1– lower importance, 10 – higher importance) Source: survey conducted by the authors


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Figure 2 provides insight on the top cyber threats all mobile operator representatives

highlighted for their companies. In the framework of the research the authors followed up

with questions for the representatives on acquiring cybersecurity insurance for their

company. Representatives from 2 mobile operator companies stated that their company

doesn’t have cybersecurity insurance, but they would be interested to see the possible

offers. One representative added that some cyber risks are already covered by their

company’s general insurance. Representatives whose companies would not be interested in

cybersecurity insurance stated that they see cybersecurity insurance as a part of their

business continuity plan, not as a separate product. Representatives also mentioned the

poor reputation cybersecurity insurance policy cases have gained in the last decade, for

instance, the 2011 cyberattacks on Sony involving the theft of personal data such as names,

passwords and addresses from more than 100 customers (Independent, 2011). Sony’s

losses were reportedly estimated to be as high as $2 billion. Despite having cyber liability

coverage through the CGL (Commercial General Liability) policy at Zurich American

Insurance Company, Sony did not receive compensation for the damages caused by the

breach. The CGL policy covered actions taken by Sony, but since the breach was caused

by third-party hackers, Zurich American was not obliged to reimburse Sony (Young,

2014). Therefore, the authors consider that in order to establish a better reputation for

cybersecurity insurance policies and their liabilities, the Latvian Insurers Association could

also play a significant role in promoting cybersecurity insurance by educating businesses

about the complexity of policies and their coverage.

In the framework of this survey, of the 2 representatives who would be interested in

cybersecurity insurance, only 1 could give an estimate on how much their company would

be willing to spend for a cyber policy – estimating it at a price of around 0.005% of the

company’s yearly turnover. Representatives also suggested that the determining factors for

choosing an insurance provider would be insurers’ international experience as the most

important factor, followed by a customized offer for their business model, and the

insurance price as the least important factor.

Representatives who indicated their company’s interest in cybersecurity insurance were

asked questions about each loss category. Only 1 representative showed interest in insuring

risk of intellectual property asset loss due to a cyberattack (expressed in terms of loss of

revenue as a result of a reduced market share). For large organizations, intellectual

property theft could have the most severe impact. Quantifying the damage caused by the

loss of intellectual property or commercially sensitive information is challenging, because

such assets are difficult to value, and the loss suffered by an organization depends on how

the attacker uses the stolen information. Research conducted by the Oxford Economics

team shows that not all industry sectors are attacked in the same way, with industries like

defence, chemicals and pharmaceuticals, and creative media being more affected in case of

intellectual property theft (Oxford Economics, 2014).

None of the representatives said they would be interested in insuring risk of business

interruption, such as lost profits or extra expenses due to unavailability of IT systems. One


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representative later stated that such risk is covered under the insurance policy they already

have. Also, none of the representatives showed interest in an insurance policy covering

costs arising from cyber extortion and cybercrime/cyber fraud, including ransom payment,

even if it is evident that representatives recognize it as one of the top cyber risks. But one

representative said his company would be interested in insuring loss of revenue due to the

impact on reputation after a cyberattack. Reputational damage is a relatively high-

frequency event, as most cyber breaches can have a reputational impact if not handled

adequately. It is also difficult to quantify damage of this nature, but the research team

agrees that such events should be on companies’ agendas since proper incident response

can limit the severity of loss. Reputational damage accounts for around 5%-20% of the

cost of a cybersecurity breach for large businesses. Organizations often overlook certain

types of costs of breaches, and so may undervalue their true impact (University of

Portsmouth, 2019).

One risk which all representatives indicated as being on their agenda – and 2

representatives stated they would be interested in having covered in cybersecurity

insurance – is breach of privacy events, such as fines and penalties related to the European

Union’s General Data Protection Regulation (GDPR). One representative added that the

GDPR has been a top priority for the past 2 years due to its topicality, but it would lose its

popularity once everyone gets accustomed to it and more employees get educated in this

matter. The research team also agrees that treating the GDPR as the main cybersecurity

issue can give a false presumption of organizations’ cyber awareness. Applying GDPR

standards certainly has a positive effect on many organizations, making them more aware

of the information they keep and how they handle it. But having GDPR training won’t

make any organization more cyberattack-resilient.

In this questionnaire, mobile operator representatives were also asked about their interest

in insuring against physical asset damage to their physical property, and only 1

representative stated that they would most likely be interested in covering this risk with

insurance. The research team agrees that not all businesses may be affected in the same

way in the event of an attack on physical assets, but it should be noted that physical losses

are a growing concern because of the interconnectedness of cyberspace and the physical

world. An example of a physical loss resulting from a cyberattack is a steel mill in

Germany where hackers managed to gain access to the control systems following a

successful phishing attack, which targeted individuals for login details. Once access was

secured, the hackers were able to cause an unscheduled shutdown of a blast furnace, which

resulted in massive damage, according to the German Federal Office for Information

Security (Song et al., 2017).

A condensed summary of this questionnaire suggests that 2 out of 3 mobile operators are

interested in a cybersecurity insurance policy, but there are only a few risk categories, such

as data breaches or the impact on reputation resulting from a cyberattack, that they are

interested in insuring. Large companies like mobile operators already have devoted a lot of

time and resources to their company’s cybersecurity, so they don’t see the benefit of


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cybersecurity insurance. So the data confirms the authors’ observation that businesses in

Latvia have low demand for cybersecurity insurance policies because of limited

information on how such policies can mitigate cyber risks.

CONCLUSIONS AND DISCUSSION

With a joint analysis of all three sides – the only provider, the potential providers and the

possible buyers – important concluding remarks have emerged. According to the research

authors and the OECD data, the main challenges in the Latvian market are similar to those

in the rest of the OECD countries, and the lack of cybersecurity insurance providers and

the low demand from companies to acquire such insurance are a large factor in market

growth (OECD, 2017).

There are several reasons for the undeveloped cyber insurance market in Latvia. The lack

of historical knowledge and evolving nature of cyber risks create significant challenges in

quantifying and expressing cyber threats in monetary value. An important impact factor for

the cybersecurity insurance market is the lack of public awareness of cybersecurity risks.

There is clearly a need for a more comprehensive understanding of cyber risks, on both the

supply and the buyer’s side, for the Latvian cybersecurity insurance market to grow

further. It is not only about the treatment and assessment of risks, but also understanding

businesses’ and clients’ needs. A set of standards, guidelines and policies could help to

clarify what critical business functions should be insured with cybersecurity insurance and

how risks interconnect with these functions.

One of the most important factors impacting the cybersecurity insurance market is the

small size of the market. Due to the small number of possible purchasers of the product,

there is also a trifling number of cybersecurity insurance brokers. The sole provider of

cybersecurity insurance in Latvia has chosen to be a mitigator by connecting possible

purchasers (those who have already bought the insurance already have high cybersecurity

risk awareness) with cybersecurity insurance brokers and experts from abroad rather than

hire a permanent office of cybersecurity insurance brokers. As a result, another impact

factor of cybersecurity insurance market development is a lack of know-how for

cybersecurity insurance in Latvia. Research shows that there is a low demand for

cybersecurity insurance policies because of limited information on how cybersecurity

insurance policies can mitigate cyber risks.

The research results indicate that the insurance industry is aware of the need for

cybersecurity insurance. At the same time, the greatest challenge that all experts and the

authors recognize is the need for companies to identify their risks and, first and foremost,

perform a risk assessment in order to effectively protect businesses and information in this

digital age. Insurance companies can’t help to prevent data breaches, but with


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cybersecurity insurance they can help in transferring some of the cyber risks instead of the

business taking on the risks by itself.

From the authors’ point of view, the next stage for cybersecurity insurance development is

to include regulatory claims and fines and penalties in the offer, thus making it more

attractive and ensuring the demand growth necessary for the economic viability of

cybersecurity insurance.

The authors also see the necessity for governmental involvement in developing

cybersecurity insurance as of utmost importance. The public sector could pool data related

to cyber risks, spread information (CERT.LV is already an existing platform) and create

toolkits to inject stimulus for demand and supply of cybersecurity insurance. In the same

category of information dissemination, greater media coverage, public education about

cyber risks and lobbying from interested parties would also motivate the development of

the cybersecurity insurance market in Latvia. Another way of increasing cybersecurity

awareness and generating high standards of cybersecurity insurance is to follow the

example of the British – introduce and enforce a certification programme (called Cyber

Essentials in the UK), which would guide businesses in protecting themselves against

cyber threats by setting out the basic technical controls that all organizations should have

in place (Marsh, 2015). A common standard certification generated by CERT.LV would

put all the companies with cybersecurity risks on the same page regarding requirements,

creating a shared understanding of risks and thus cybersecurity insurance.

This research paper offers the beginning of a dialogue between experts, businesses and

governance on a general framework and development of the main guidelines for

cybersecurity insurance services.


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Received: 26 March 2020


DOI: 10.32025/JBM19005

Financial sector reform (2016-2019):

The impact on Latvian banks

JEKATERINA SNEIDERE

IVARS GODMANIS

ABSTRACT

The purpose of this research is to get the first results on the impact of the recent financial sector

reform started in 2016 by the Latvian FCMC (Financial and Capital Market Commission) and the

Latvian government on the performance of two traditional Latvian banking groups: resident and

non-resident banks. The main objective is to find out how the outflow of non-resident deposits

caused by the reform has affected both banking groups’ main performance indicators: the capital

adequacy ratio (CAR) and return on equity (ROE).

The methodology of the research involves obtaining ROE and CAR parameters in the whole

Latvian banking sector before and during the recent financial sector reform and analyzing these

parameter dynamics and differences, particularly for resident and non-resident banks.

The results obtained clearly demonstrate that the recent reform of the Latvian financial sector has

affected resident and non-resident bank performance in Latvia very differently.

The outflow of non-resident deposits during the reform implementation has made a minimal impact

on the performance of resident banks, but significantly affected non-resident banks, triggering a

decline in their total assets, total deposits, and profitability.

The results obtained show some “recovery” of non-resident bank performance at the second stage of

reform (after 2017), which could demonstrate the reorientation of their business models agreed with

the FCMC. However, there is a need for further research to be sure that this process will be

sustainable.

Keywords: Latvian banking sector, financial sector reform, non-resident deposits, AML/CTPF,

non-resident banks.


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INTRODUCTION

An ambitious Latvian financial reform was started in 2016 with the aim to improve the

reputation of the Latvian banking sector, which historically consists of two traditional

groups: resident and non-resident banks.

Implementation of this reform by the Latvian government and the Financial and Capital

Market Commission (FCMC) was based on OECD criticism (2015) of the shortcomings in

Latvia’s AML/CTPF (anti-money laundering / counter terrorism and proliferation of

weapons of mass destruction financing) system, the European Parliament and Council

AML IV Directive (2015) and the MONEYVAL report (2018) regarding the large cross-

border flow of financial resources through Latvian banks, insufficient measures to fight

corruption, poor quality of reports on unusual and suspicious transactions, shortcomings in

customer due diligence, and risks related to circumvention of international sanctions.

By implementing the reform, the Latvian FCMC began to tighten up its assessment of bank

compliance with the AML/CTPF standards and increased the amount of fines for

violations of AML/CTPF.

The share of non-resident deposits in the Latvian bank total portfolio was significantly

high (53% in 2015) and therefore particular attention in this reform was given to 12 non-

resident banks in Latvia, which became subject to AML/CTPF inspections by independent

advisory firms from the United States. During the implementation of the reform, major

changes have been made in the legislation governing AML/CTPF, such as the clarification

of the definition of politically exposed persons to include residents and the prohibition to

cooperate with shell companies if they exhibit a certain set of characteristics.

The goal of this research is to obtain the first results of the impact of the Latvian financial

sector reform (2016-2019) on the performance of Latvian banks and analyze the

differences of this impact in resident and non-resident banks.

The research questions are as follows: What are the main consequences of the recent

financial sector reform in Latvia for the whole banking sector? Are there any essential

differences in the performance of the traditional two groups of banks (resident and non-

resident) during the reform implementation? What could be the future of non-resident

banks and their further business strategy in Latvia?

Theoretical background

The capital adequacy ratio (CAR) is one of the most important bank performance

parameters in modern international banking regulation, which is the focus of more than

100 national central banks and banking supervisors (Diamond and Rajan, 2000). By


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definition, capital requirements are rules that limit the amount of leverage and risk that

banks can take, as well as the level of capital adequacy that banks must achieve (Howarth

and Quaglia, 2013).

Basel III regulations (Basel Committee on Banking Supervision, 2011) set minimum

reserves above the minimum capital requirement: the countercyclical capital buffer to be

built up during economic upturns and to be used during downturns, as well as the capital

conservation buffer (Repullo and Suarez, 2013). The structure of the minimum capital

requirement and additional reserves is shown in Figure 1.

Figure 1 Basel III requirements for CAR

(Moody’s Analytics, 2013)

In general, capital requirements for Latvian banks coincide with the requirements set out in

the Basel III framework. However, there are differences that are characteristic of the EU

capital regulation and the requirements set by the Latvian FCMC: the minimum CET1 and

Tier 1 capital ratios have been raised to 4.5% (from 2%) and 6% (from 4%); the

countercyclical capital buffer in Latvia was set at 0% in order to stimulate more lending

(Financial and Capital Market Commission, 2012-2018). The total capital requirements

binding on Latvian banks are shown in Figure 2.


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Figure 2 Total capital adequacy ratio (CAR) requirements for Latvian banks

(Bank of Latvia, 2019)

The asymmetric impact of Basel capital requirements on large and small banks is widely

discussed. It has been emphasized that the same capital requirements for all banks,

regardless of their size, distorts competition between different categories of banks and the

impact of the same capital requirements on small and large banks is asymmetric (Hakenes

and Schnabel, 2011).

There is a point of view (Haufler and Maier, 2016) that higher capital standards will lead to

the consolidation of the banking sector as smaller or weaker banks exit the market.

A study on the factors contributing to the profitability of Central and Eastern European

banks in the period from 2000 to 2013 (Djalilov and Piesse, 2016) shows that Baltic banks

(including Latvian banks) are characterized by a positive effect of capital adequacy ratios

on banks’ ability to generate higher profits.

However, there is also the opposite view that increasing capital requirements run the risk

of reducing investment and bank lending, which ultimately reduces their profitability

(Kashyap and Stein, 2004). Another study on bank capital requirements reveals that higher

capital requirements for banks significantly reduces their lending capacity, which in turn

has a negative impact on profits (Fraisse et al., 2017).

Analysis of bank profitability indicates that the most common determinants of banks’

ability to generate profits are the size of the banks (in terms of their assets), such risk

indicators as credit risk and liquidity risk, and capital ratios (Djalilov and Piesse, 2016).


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Banks’ profitability is usually assessed by calculating indicators such as the ratio of a

bank’s financial result (net profit) to the amount of resources used – return on equity

(ROE) (Casu et al., 2006).

The ROE indicator describes the efficiency of the use of equity and determines the level of

return on shareholders’ funds invested in the bank. It is calculated according to Formula 1

(European Central Bank, 2010):

𝑅𝑂𝐸 = Net Profit

𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑎𝑛𝑑 𝑅𝑒𝑠𝑒𝑟𝑣𝑒𝑠∗ 100% (1)

METHODOLOGY

The research is based on the financial data statistics of Latvian banks from the banks’

individual public quarterly reports for the period from 2012 to 2018, available on the

FCMC website (Financial and Capital Market Commission, 2012-2018).

Banks were divided into two groups as defined by the FCMC (Financial and Capital

Market Commission, 2019). The first group (Group 1) includes banks with a share of non-

resident deposits of less than 20% (resident banking group) while the second group (Group

2) is comprised of banks focused on servicing foreign customers with non-resident

deposits exceeding 20% in the total deposit base (non-resident banking group). The

breakdown of individual banks into resident (1) or non-resident (2) banks can be seen in

Table 1.

Table 1

Breakdown of Latvian banks into resident (1) and non-resident (2) banking groups

2012-2018

2012 2013 2014 2015 2016 2017 2018

ABLV Bank* 2 2 2 2 2 2 -

Baltic International Bank 2 2 2 2 2 2 2

BlueOrange Bank 2 2 2 2 2 2 2

Citadele banka 2 2 2 2 2 2 1

Expobank 2 2 2 2 2 2 2

LPB Bank 2 2 2 2 2 2 2

Luminor Bank AS ** 1 1 1 1 1 1 1

Meridian Trade Bank*** 2 2 2 2 2 2 2

PNB Banka **** 2 2 2 2 2 2 2

PrivatBank 2 2 2 2 2 2 2

Continued on the next page


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Table 1 (continued)

Reģionālā investīciju banka 2 2 2 2 2 2 2

Rietumu Banka 2 2 2 2 2 2 2

Rigensis Banka 2 2 2 2 2 2 2

SEB banka 1 1 1 1 1 1 1

Signet Bank AS ***** - - 2 2 2 2 2

Swedbank 1 1 1 1 1 1 1

Trasta Komercbanka ****** 2 2 2 2 - - -

* The bank’s self-liquidation commenced in 2018; ** Established in 2017 by the merging of

DNB Bank and the Latvian branch of Nordea Bank, until then – DNB Bank; ***until 2014 –

SMP Bank; **** until 2017 – Norvik Bank; ***** established in 2013, until 2017 – Bank

M2M Europe; ****** The bank’s operations were suspended in 2016.

(Source: compiled by the authors)

Dynamics of total deposits and capital adequacy ratio (CAR) as well as return on equity

(ROE) in Latvian banks have been monitored before and during financial reform

implementation and analysis has been made for resident and non-resident banks in

particular.

RESULTS AND DISCUSSION

Deposit dynamics in Latvian banks during the period of 2014-2019

The results obtained show (see Figure 3) that in the period of 2015-2019, the amount of

total deposits in the whole banking sector fell by 31% (from 22.6 billion EUR to 15.7

billion EUR), while the dynamics of resident and non-resident deposits were completely

the opposite: non-resident deposits fell by 74% (from 12.1 billion to 3.2 billion EUR), but

resident deposits grew by 17% (from 10.5 billion EUR to 12.4 billion EUR).

The structure of deposits in the whole Latvian banking sector fundamentally changed: the

share of non-resident deposits decreased more than 3 times (from 54% to 17%) and

consequently, the share of resident deposits increased 2 times (from 46% to 83%).


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Figure 3 Structure of deposits attracted by Latvian monetary financial institutions,

2014-2019 (EUR billion) (Bank of Latvia, 2014-2019)

(compiled by the authors)

The sharpest drop in total deposits (21%) was observed in 2018, partly due to the

termination of ABLV Bank’s activities (see Figure 4).

Figure 4 Dynamics of deposits attracted by Latvian monetary financial institutions,

2015-2019 (%) (Bank of Latvia, 2014-2019) (compiled by the authors)

As a result of the financial sector reform, with the significant decline in the total amount of

deposits (comprising mainly those of non-residents), the Latvian banking sector’s total

assets have been decreasing since 2016 (see Figure 5).


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Figure 5: Dynamics of the total gross assets of the banking sector, 2014-2018 (EUR

million, %) (Finance Latvia Association, 2012-2018; Rietumu Bank JSC, 2019)


Comparing the dynamics of total deposits and total assets in both banking groups (see

Figure 6), we can see that the financial sector reform, which started in 2016, had a

completely opposite impact on resident and non-resident banks: a significant decrease in

total deposits and total assets in the non-resident banking group (of 12% (2016) and 28.7

% (2018)) and consequent increase in the resident bank group (of 2.2% (2017) and of 6.4

% (2018)).

Figure 6: Dynamics of total deposits and total assets of resident banks and non-

resident banks, 2012-2018 (EUR million, %) (Financial and Capital Market

Commission, 2012-2018) (compiled by the authors)


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It is important to clarify whether the effect of the shrinking non-resident deposits in the

two traditional Latvian banking groups (the resident and non-resident banks) has been

similar or different. The information compiled by the FCMC (see Figure 7) clearly shows

that the rapid decline in non-resident deposits has taken place only in the non-resident bank

group, while non-resident deposits did not decrease in the resident bank group.

Figure 7 Dynamics of resident and non-resident deposits in the resident and non-

resident banking groups (EUR billion) (Financial and Capital Market Commission,

2019)

The share of non-resident deposits in resident banks had already been below the limit of

20% prior to the commencement of the reform. The fact that with the reinforcement of the

reform (including AML/CTPF measures, the prohibition to cooperate with shell

companies) the volume of non-resident deposits in the resident banking group has not

changed significantly may lead to speculation that the “quality” of foreign customers in

resident banks could have been higher than in non-resident banks. However, such statistics

are not publicly available, and further investigation is needed to prove it.

CAR dynamics of Latvian banks in the period of 2012-2018

The average capital adequacy ratio (CAR) of the whole Latvian banking system during the

period from 2012 to 2018 significantly exceeded the minimum capital requirement of 8%

set by the Basel III regulation and the FCMC, while the minimum capital requirement

together with the capital maintenance reserve of 2.5% was introduced by the FCMC in

accordance with Basel III and the EU capital regulation (see Figure 8).


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Figure 8: Average CAR value in the whole Latvian banking sector (Financial and

Capital Market Commission, 2012-2018) (compiled by the authors)

However, CAR dynamics in resident and non-resident banks in Latvia before and during

the financial reform showed a different pattern.

CAR values of the resident banking group varied from 12.5% (2012) to 39.3% (2015) (see

Figure 9), but even the minimum CAR value was at least 4.5 percentage points above the

minimum capital requirement (8%).


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Figure 9: CAR values of resident banks (Financial and Capital Market Commission,

2012-2018) (compiled by the authors)

CAR values of the resident banking group consequently increased from 22.2% (2012) to

39.3% (2015) but then experienced a sharp drop in 20161 and later increased slightly.

During the entire period (2012-2018), CAR values of resident banks were always above

the minimum CAR required by the FCMC and even the minimum CAR values of

particular resident banks were 4.5 percentage points above the minimum required CAR

(8%).

CAR values of the non-resident banking group for the same period of 2012-2018 were

subject to greater divergence and more often approached the minimum capital requirement.

In the years 2012-2015 and 2018 their CAR values were even below the required 10.5%

(see Figure 10) (an indicator which includes the minimum capital requirement of 8% and

the capital maintenance reserve of 2.5%).

1 The sharp drop in CAR in 2016 was not caused by reform implementation but by a one-off decision from

Swedbank to lower its capital (Swedbank JSC, 2017).


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Figure 10 CAR values of non-resident banks in Latvia (2012-2018) (Financial and

Capital Market Commission, 2012-2018) (compiled by the authors)

The results obtained demonstrate that during the period of reform implementation, CAR

values of all resident banks were always over the required minimum level of 10.5% and

were characterized by less dispersion and higher stability, which was mainly the result of

their high level of capitalization, choice of conservative capital instruments and transparent

capital structure, stable profitability, and significant excess of interest income over

commission income.

CAR values of non-resident banks during the same period were more widely dispersed and

for some banks the capital level even before and during the years of financial reform was

below the minimum capital requirement, which could be explained by the use of Tier 2

capital instruments by non-resident banks, raising additional capital (incl. subordinated

bonds and subordinated loans).

Differences obtained in CAR values and the dynamics of the two banking groups

demonstrate that the more volatile non-resident bank business model is more exposed to

the impact of financial sector reform than the resident bank model.

ROE dynamics of Latvian banks in the period of 2012-2018

The average ROE of the whole Latvian banking sector during the period of 2013-2018 was

stable, varying between 13.8% and 15.3% (see Figure 11).


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Figure 11 Average ROE value in the whole Latvian banking sector (2012-2018)

(Financial and Capital Market Commission, 2012-2018) (compiled by the authors)

At the same time, ROE values and their dynamics showed different patterns in resident and

non-resident banks.

The average ROE for resident banks during the period of 2012-2018 was more stable: the

arithmetic average value of ROE ranged from 7% in 2013 to 12% in 2018 and was almost

always positive in all the years considered.2 (Figure 12)

2 The exception is the operating result of Luminor bank in 2017, which is mainly related to the merger of DNB

bank and the Latvian branch of Nordea Bank AB, which had an impact on the financial results of the combined

bank due to one-time costs, incl. from investments in property and impairment losses (Luminor bank JSC,

2018).


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Figure 12 ROE values of the resident bank group (Financial and Capital Market


The ROE values of non-resident banks were much more dispersed, ranging from -43.6% in

2013 to +42.8% in 2016 (see Figure 13).

Positive ROE values for all non-resident banks in Latvia are observed only in 2016.

Figure 13 ROE values of the non-resident bank group (Financial and Capital Market



94

The results obtained show that the ROE values of non-resident banks, similarly as CAR,

are more widely dispersed in comparison to resident banks in Latvia, with some non-

resident banks constantly demonstrating significant losses in the period of 2012-2018. The

only year when all non-resident banks have positive ROE is 2016 – the starting year of

financial reform.

Both performance parameters demonstrate the higher volatility of non-resident banking

business, which for some non-resident banks is under threat of non-compliance with

regulatory requirements.

Impact of total deposit dynamics on resident and non-resident bank profit during the

period of 2012-2018

If we look simultaneously at the dynamics of total deposits and profits before taxes in

banks during the period of 2012-2018 and compare the patterns for resident and non-

resident banks, we come to two different results (see Figure 14).

Figure 14 Dynamics of total deposits and profit before tax of resident and non-

resident banks, 2012-2018 (EUR million, %) (Financial and Capital Market


For resident banks, with the increase in total deposits, profit before taxes did not change

very significantly (with the exception of a sharp peak in 2015).3

For the non-resident bank group, profit before taxes experienced a much steeper increase

in the period before the start of financial reform, and that correlates with an increase in

total deposits, but with the first year of reform implementation, both total deposits and

3 A one-off increase in profit in 2015, which exceeded EUR 40 million and affected the entire resident group,

was held by Swedbank. In 2016, Swedbank’s profit before tax fell by more than EUR 40 million because no

more income from loan repayments was received, and the previously created loan provisions were not released

(Swedbank JSC, 2016).


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profits began to decrease sharply. The dynamics of profit decrease in 2017 were 10 times

faster (63.2 % in 2017) than in resident banks.

If we look at the bank income structure, both the net interest income and net commission

income of non-resident banks declined with the outflow of foreign depositors (see Figure

15), but commission income and total profit before tax continued to grow in 2016 and fell

with a one-year offset only in 2017. The increase in commission income in 2016, as the

deposit portfolio shrank by 15.3%, can be explained by the fact that banks charged high

commissions when transferring large cash flows away from the Latvian banking system to

foreign customers.

Figure 15 Dynamics of net interest income and net commission income of non-resident

banks, 2013-2018 (%) (Financial and Capital Market Commission, 2012-2018)


The interesting fact is that the non-resident banking group’s performance started to recover

in 2018 (see Figure 15). Although one year is too short a period of time to draw

conclusions, one can note that the positive dynamics coincided with the application of new

business strategies by non-resident banks agreed with the FCMC and may be related to the

fact that, in general, non-resident banks were starting to adjust to the new market situation.

Our suggestion is that survival and further successful performance of non-resident banks

will be essentially determined by refocusing their business strategies in order to maintain

and improve their profitability, by developing credit services for local and EU-resident

businesses and households, while not fully ceasing to dispose of non-resident deposits.

Non-resident banks should also develop co-operation with other market players by offering

syndicated loans to share credit risk and attract high-quality customers and should provide

alternative lending products that generate high commission income to offset the


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commission income that has been previously generated by serving high-risk non-resident

client transactions.

CONCLUSIONS

1. The historically formed two banking groups in Latvia (resident and non-resident

banks) demonstrated different performance patterns during the period of 2012-

2018: CAR and ROE parameters for non-resident banks were much more

dispersed and sometimes approached critical values, which has clearly

demonstrated the volatility and riskiness of the non-resident banking business

model in Latvia.

2. Therefore, the implementation of the Latvian financial sector reform initiated by

the Latvian government and the regulator in 2016 aimed at improving the

reputation of the Latvian financial sector and combating ML/TPF has caused a

significant outflow of deposits and significantly lowers the performance only of

non-resident banks in Latvia.

3. The implementation of the Latvian financial sector reform had a minimal impact

on resident bank performance in Latvia.

4. The partial “recovery” of non-resident bank performance at the next stage of

financial reform (after 2017) could be an indication that non-resident banks were

demonstrating some adaptation to the new business environment without having

significant amounts of non-resident deposit inflows.

5. Our suggestion is that survival and further successful performance of non-resident

banks in Latvia will be essentially determined by refocusing their business

strategies in order to maintain and improve their profitability, by developing credit

services for local and EU-resident businesses and households, while not fully

ceasing to dispose of non-resident deposits.


97

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100



DOI: 10.32025/JBM19007

An analysis of factors affecting the

performance of supplier SMEs

JANIS GERCANS

SANDIS BABRIS

ABSTRACT

Purpose. While the performance of each company is still an important factor in gaining a

competitive advantage, in an open economy, the performance of an entire supply chain becomes a

crucial factor in the competitiveness of many interconnected companies. In this study, factors that

might influence the performance of small and medium-sized enterprises (SMEs) that provide

production services for the contracting company are analysed.

Methodology. In this study, the performance data of harvesting (n=46), timber transportation

(n=23), and chipping (n=3) service suppliers in the supply chain of JSC Latvia’s State Forests

(LVM) are analysed. Based on the supplier’s performance data, a group of experts, including two

executive directors and five process managers, defined the problems and their root causes. The

Ishikawa diagram and 5Why method were used. The root causes were redefined as hypotheses and

regrouped into three groups: 1) workforce factors; 2) managerial factors; 3) contract-term factors.

Hypotheses were verified by conducting a survey of suppliers’ employees (n=594) and executives

(n=59).

Findings. It was found that employees’ dissatisfaction with shift work and salaries which do not

correspond to work responsibilities, along with suppliers’ disregard of the evaluation of employees’

skills, complicated work requirements, the lack of training for employees, and the direct manager’s

insufficient knowledge about the skills needed for employees are the factors that significantly

influence voluntary labour turnover and might lead to the leakage of skilled employees from

suppliers, causing a performance decline. Meanwhile, there is no significant difference between

high and low-performing supplier groups in terms of managerial knowledge, while a limited

contract duration does not undermine low-performance suppliers’ efforts to improve performance.

Value. In this study, factors that might cause performance problems for supplier SMEs are

analysed. In the existing literature, it has been found that voluntary labour turnover might negatively

influence the performance of a company (McElroy and Morrow, 2001; Brown et al., 2009; Eady

and Nicholls, 2011). This study attempted to assess factors causing voluntary labour turnover


101

among other factors. The main contribution of this study is to the literature regarding voluntary

labour turnover, supplementing the factors that might cause it.

Keywords: suppliers’ performance, root cause, voluntary labour turnover, SMEs

Paper category: research paper

INTRODUCTION

Competition between single firms is becoming less common as networks of firms compete

against each other. In this environment, the disadvantages of an individual firm are often

linked to the disadvantages of the network in which the firm operates (Dyer and Singh,

1998). Collaboration has many forms, such as strategic alliances, joint ventures, third-party

logistics, short and long-term contracts, partnership sourcing, and retailer–supplier

partnerships (Bernhard et al., 2006). These networks provide firms with opportunities to

establish mutually beneficial relationships in which to create competitive advantages and

impose an obligation to manage performance and overcome obstacles.

Cooperation, compared to a purely competitive approach, makes it possible to extract

savings since it gives suppliers the confidence that investments will pay off in the long run

(Terpend and Krause, 2015). However, small businesses are, in general, conservative and

do not want to overexpose or overextend themselves to certain investments. They limit

their spending and commitment and only do what is essential to reduce uncertainty in

running their business (Adams et al., 2012). The supplier potentially benefits from

collaborating with the buyer if their collective efforts translate into superior products and

hence increased market share (Terpend and Krause, 2015). Furthermore, supplier

performance strongly influences buyer performance in the short and long run (Parmigiani

and Mitchell, 2005). Suppliers that do not achieve performance targets either need to be

developed or replaced (Glock et al., 2017), but terminating a contract might not always be

possible, as the buyer may not have an alternative supplier (Porteous et al., 2015). In

addition, if a supplier underperforms due to a lack of common knowledge, the supplier

should be inspired with confidence and supported to increase the company’s relative

absorptive capacity rather than being replaced (Kim et al., 2015). These aspects point to

the importance of suppliers’ development and performance improvement activities.

Supplier relationship management encompasses various activities, such as the

identification and selection of appropriate suppliers, the evaluation and development of

suppliers, and the continuous monitoring of the suppliers’ performance (Glock et al.,

2017). Generally, cooperative activities such as supplier development and supplier

integration are effective, while supplier monitoring does not have a positive influence on

supplier performance (Akamp and Muller, 2013). Direct involvement activities, where the

buying company internalises a significant amount of the supplier development effort, play

a critical role in performance improvement (Krause et al., 2000). In addition to standard


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supplier development practices, such as process efficiency and quality improvement, a

buying firm may also consider helping the supplier to develop inter-organisational

networks to enhance supplier buying company-specific innovation value (Yana et al.,

2017). Buyer and supplier commitment through maintained specificity intentions,

operational linkages, and specific investments is likely to foster long-term buyer-supplier

relationships. The latter, consequently, improves organisational performance due to

knowledge and process-sharing (Adams et al., 2012). This characterises the essentiality of

supplier performance management in product and process improvement by development

activities and long-term contract relationships.

Performance management is an uninterrupted process of identifying, measuring, and

developing the performance of individuals and teams and aligning it with the strategic

goals of the organisation (Aguinis, 2009). Buying firms that share information with and

require improvements to suppliers are readily able to respond to market demand (Ralston

et al., 2015). Service-buying firms, to a greater extent than product-based firms, tend to

rely on the competitive pressure of market forces to encourage supplier performance

(Krause and Scannell, 2002) since the supplier’s most relevant competitors are those with

which it shares a buyer (Chatain, 2011). Product-based firms tend to use assessment,

incentives, and direct involvement to a greater extent than service firms (Krause and

Scannell, 2002). A buying firm should be aware of their suppliers’ abilities and limitations

to decide when and where supplier development should occur (Lawson et al., 2014).

Accordingly, it is essential to analyse the supplier’s performance, identify problems, and

search for the root causes. Considering the conservative nature of small businesses (Adams

et al., 2012), this study focuses on suppliers belonging to the small and medium-sized

enterprise (SME) category. In business literature, little attention has been paid to the

identification of performance problems’ root causes and suppliers’ development activities

in addressing them. However, the literature indicates that it is beneficial for managers to

take time to identify and understand the root cause of any problem accurately, no matter

how large or small the problem may seem (Arnheiter and Greenland, 2008), and to find the

root cause before taking action (Finlow‐Bates, 1998). Thus, the following research

question is put forward: what are the root causes of a supplier’s performance problems?

The objective of this study is to determine the factors that might cause performance

problems for supplier SMEs. The root cause analysis (RCA) concept is applied to achieve

the study objective.

In the next section of the study, literature concerning supplier performance management

and the RCA of suppliers’ performance problems are analysed. In the third section, the

research methods are developed and described. Then, in section four, the study results are

reported and analysed. In section five, the findings are discussed and suggestions for

further research are proposed, and in section six, the article is concluded with the

limitations of the study.


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LITERATURE REVIEW

Definitions

There are various definitions of RCA in the literature. Latino et al. define RCA as follows:

“the establishing of logically complete, evidence-based, tightly coupled chains of factors

from the least acceptable consequences to the deepest significant underlying causes” (Latino

et al., 2011). Andersen and Fagerhaug define RCA as “a structured investigation that aims

to identify the true cause of a problem and actions necessary to eliminate it” (Andersen and

Fagerhaug, 2006). The objective of the present study does not include the actions necessary

to eliminate the problem causes. Therefore, in the context of this study, RCA is defined as a

logically complete and evidence-based investigation that aims to identify the real cause of a

problem (Latino et al., 2011; Andersen and Fagerhaug, 2006). A problem is defined as a

negative deviation from a performance norm or standard (Latino et al., 2011). While the

cause is the reason for the problem that the management has the ability to fix (Lehtinen et

al., 2011; Sarkar et al., 2013), it is preferable to explain the causes with numerical values

attached to them, and it is better to express them in a negative way (Sarkar et al., 2013).

RCA is an efficient method to detect new process improvement opportunities and develop

improvement ideas (Lehtinen et al., 2011). Thus, RCA is a proper method for performance

problem cause detection before a particular action is taken.

Root cause analysis method

Latino et al. recommend that we should have a means of collecting data related to events

that affect the performance of the stated objectives. Afterward, we must decide on criteria

that will initiate the execution of an RCA and decide if RCA is required. The key to

successful analysis is to make sure that the data and information to determine the causes of

the problem are being studied (Latino et al., 2011). The data must be collected, analysed,

and compared in a way to reveal the causes and simplify further analysis (Ishikawa, 1976).

An RCA team has to be assembled, and the team must review the problem and determine

what data will be needed to determine the root causes. A logic tree can be utilised to

evaluate hypotheses and specify root cause verification methods. Then, hypotheses

regarding root causes must be verified, determined and grouped according to whether the

cause is physical, human, or latent (Latino et al., 2011). Ishikawa proposes the use of a

cause-and-effect diagram to illustrate relationships between the cause and the problem

(1976). The recommendation is that the causal factors should be grouped into work

methods, materials, equipment, and measurement (Ishikawa, 1976). Practitioners tend to

use brainstorming, cause-and-effect analysis, and the five whys or the 5W + 1H (who,

when, where, why, what, how) methodology to determine the root cause (Reid and Smyth-

Renshaw, 2012). Team members are asked five ‘why’ questions to determine the root


104

cause (Ishikawa, 1976). Various authors have analysed RCA applicability and its pros and

cons (Sarkar et al., 2013; Lehtinen et al., 2011; Emery, 2009; Iedema et al., 2008;

Arnheiter and Greenland, 2008; Finlow‐Bates, 1998; Dobrusskin, 2016; Reid and Smyth-

Renshaw, 2012). In this study, the cause-and-effect diagram is considered to be the most

suitable method, and five ‘why’ questions are used to search for the root cause. The choice

of the method is based on its simple use. The use of more sophisticated methods requires

the training of the practitioners’ expert group and repeated practice to achieve the objective

of the RCA. In a further literature review, the factors that might influence the performance

of suppliers are analysed.

Workforce performance

The productivity of the supplier’s workers can influence the costs and thus the price of the

product or service it provides. The theory of personnel economics predicts that pay based

on output will induce workers to supply more output because of incentive effects. The

productivity and average effort level of workers increases when moving from a fixed wage

to piece-rate pay, and high-skill workers tend to select the piece-rate pay scheme (Lazear,

2000; Eriksson and Villeval, 2008; Franceschelli et al., 2010). Other studies show that

workers are insensitive to pay-for-performance exposure regarding working hours,

intentions to quit, life, and job satisfaction (Allen et al., 2017). However, intentions to quit

and labour turnover might influence a supplier’s performance. Studies show that voluntary

labour turnover has negative consequences for profitability, productivity, and costs

(McElroy and Morrow, 2001), and if the quit rate decreases, the firm’s performance

increases (Brown et al., 2009). The cost of labour turnover will be highest for those

companies whose production needs are complex and quality requirements are demanding

(Eady and Nicholls, 2011). However, economic performance depends on many factors that

vary according to the type of firm and related circumstances. It would be wise to work at

least with a motivated threshold value, specific for a firm or industry, that indicates from

which point onwards turnover can be considered as a negative indicator (Glebbeek and

Bax, 2004). It is also vital to know who leaves the firm and the type of work. High-

performing workers’ turnover has a strong negative impact on firms’ return on equity

(ROE) and return on assets (ROA), and firms which invest less in human capital would

face a more substantial negative impact of high-performer turnover than those that invest

more (Kwon and Rupp, 2013). However, the turnover of unskilled workers in a context

with low hiring costs and losses in labour productivity has an inverted U-shaped

relationship between employee turnover and performance (Siebert and Zubanov, 2009).

Previous studies also show that job satisfaction, tenure (Breukelen et al., 2004; Caillier,

2011), earning graduate degrees without career promotion (Benson et al., 2004), co-

workers’ job embeddedness and job search behaviour (Felps et al., 2009), gender

composition in the workplace (Bygren, 2010), employer-provided training (Haines et al.,

2010), occupational commitment (Schmidt and Lee, 2008), and emotional exhaustion

(Chau et al., 2009) might cause voluntary labour turnover. Thus, voluntary labour turnover


105

might influence supplier performance in terms of profitability, productivity, and costs. The

influence might be even more significant in SMEs that employ high-skill workers such as

forest machine operators. To find out the root causes of high-skill workers’ voluntary

labour turnover in SMEs, the following hypotheses are put forward:

H1: voluntary labour turnover is caused by:

a) workers’ dissatisfaction with the current shift work

b) disregarding the evaluation of workers’ professional skills

c) non-compliance of salaries with work responsibilities

d) complicated work requirements

e) disregarding workers’ training

f) managers’ lack of knowledge about the skills needed for employees

g) high labour demand

h) low confidence regarding professional skills

i) lack of a premium on salaries for productivity

j) lack of a premium on salaries for the quality of the work

k) lack of desire to improve professional skills

l) high discipline at work

Knowledge of managers

Considering that leaders must deal with various roles and duties, make sound decisions,

solve problems, develop new ideas, and engage with partners and clients (Chan et al.,

2017), they need to have extensive knowledge of the functions that are important for the

company. Companies might acquire the necessary management knowledge by hiring

professionals in a particular field. However, SMEs have limited financial resources to hire

knowledgeable professionals for their management functions, such as financial, quality,

efficiency, and human resource management. Thus, insufficient expertise in management

functions might be the root cause of suppliers’ incapability of achieving performance

objectives. To find out whether managers of high-performing suppliers have significantly

better knowledge in a management function, the following hypotheses are put forward:

H2: low-performance suppliers’ managers do not have sufficient knowledge in:

a) the development of a motivating remuneration system

b) the management of employees’ skills

c) the company’s financial management

d) the management of a company’s efficiency


106

e) quality management

H3: low-performance suppliers’ managers have difficulty in attracting professional

employees.

Managers are asked self-appraisal questions (Alter, 2002; Shore and Tashchian, 2002) to

evaluate their knowledge and test hypotheses.

Collaboration performance

Cooperation between buyer and supplier might lead to performance improvement, and lack

of it could cause problems. Studies show that supply chain partners’ intentions to invest in

supplier development critically depend on the length of the contract period. Supplier

development can be improved by dynamically extending the contract, thus avoiding the

risk of being contractually tied for an unnecessarily long period (Worthmann et al., 2016).

Moreover, without the assurance of a long-term contract, a supplier is unlikely to make

investments that would reduce the cost for one particular buyer and would constitute an

unacceptable risk (Terpend and Krause, 2015). The influence of buyer commitment on

supplier firm performance depends on which buyer cost reduction strategy is used (Yoon

and Moon, 2017). Studies show that shared problem-solving with suppliers harms

profitability and flexibility but does not significantly affect financial performance (Brito et

al., 2014), and social interaction ties do not directly influence cost reduction (Carey et al.,

2011). The buyer’s communication process in evaluating the supplier does not ensure

improved supplier performance unless the supplier is committed to the buying firm

(Prahinski and Benton, 2004). Moreover, Modi and Mabert point out that evaluation and

certification efforts are the most crucial supplier development prerequisites before

undertaking operational knowledge transfer activities, such as site visits and supplier

training (Modi and Mabert, 2007). In addition, the buyer can influence the supplier’s

commitment through increased efforts in cooperation and commitment (Prahinski and

Benton, 2004), and collaborative inter-organisational communication is an essential factor

to turn an organisation’s efforts into supplier performance improvements (Modi and

Mabert, 2007); also, information exchange with suppliers has a significant effect on

profitability (Brito et al., 2014). Accordingly, the length of the contract period, its

extension conditions, and the commitment of both parties might influence the efforts in

performance improvement activities. Additionally, it is argued that a limited contract term

might reduce suppliers’ efforts to improve their processes and invest in development. A

limited contract term is particularly relevant for state-owned enterprises, for which the

maximum contract term with suppliers is specified by law. Therefore, the following

hypotheses are put forward:

H4: a contract term limited by a five-year period significantly undermines low-performance

suppliers’ efforts to:

a) improve efficiency


107

b) improve quality

c) make proposals for cooperation improvement

d) invest in workforce development

e) invest in technological development

Given that voluntary labour turnover might negatively influence the performance of

different companies (McElroy and Morrow, 2001; Brown et al., 2009; Eady and Nicholls,

2011; Kwon and Rupp, 2013), hypothesis H1 is tested studying 59 suppliers regardless of

performance level, and employees are chosen as respondents. Voluntary labour turnover is

attributed to ‘workforce factors’. However, to assess whether low performance of suppliers

is caused by insufficient managerial knowledge (attributed to ‘managerial factors’, H2 and

H3) or a limited contract term that undermines low-performance suppliers’ efforts

(attributed to ‘contract-term factors’, H4), executives of suppliers’ companies are chosen as

respondents. In summary, the hypotheses derived from the performance-influencing factors

are elaborated in the following model.

Figure 1 Supplier performance-influencing factors

METHODS

In this study, the performance data of harvesting (n=46), timber transportation (n=23), and

chipping (n=3) service suppliers in the supply chain of JSC Latvia’s State Forests (LVM)

are analysed. Based on the supplier’s performance data, a group of experts, including two

executive directors and five process managers, defined the problems and their root causes

(Latino et al., 2011; Reid and Smyth-Renshaw, 2012). The Ishikawa diagram and 5Why

Performance

objectives set

by the buyer

Sup

plier in

ternal

factors

Workforce factors

H1

Managerial factors

H2; H3

Co

llabo

ration

factors

Contract-term factors

H4


108

method were used (Ishikawa, 1976). The root causes were redefined as hypotheses and

grouped into three groups: 1) workforce factors; 2) managerial factors; 3) contract-term

factors. Hypotheses were verified by conducting a survey of suppliers’ employees (n=594)

and executives (n=59). Likert’s 5-point scale is used in the questionnaire for most

questions (Appendix 1). Pearson’s chi-squared test is used for the analysis of employees’

questionnaire data and testing hypothesis H1, and the Mann–Whitney U test is applied for

the analysis of the executives’ questionnaire data and testing hypotheses H2, H3 and H4.

The study method is presented in Figure 2.

Figure 2 Study method scheme

RESULTS

The group of experts identified two main performance problems of suppliers: 1) 52% of

suppliers do not achieve the labour productivity objectives set by the buyer; 2) 33% of

suppliers do not achieve quality objectives set by the buyer. The hypotheses derived from

Analysis of

suppliers’ performance

data

(Group of

experts)

Identification of suppliers’ performance problems,

search for root causes and

proposition of hypotheses

(Literature, group of

experts, Ishikawa

diagram, 5Why)

Elaboration of

suppliers’ employees’

and executives’ questionnaire

(Likert’s 5-point

scale)

Survey of suppliers’ employees n=594

(paper questionnaire)

Analysis of suppliers’

employees’ questionnaire data

and testing hypothesis H1

(Pearson’s chi-squared test)

Survey of suppliers’ executives n=59

(computer-aided

telephone interviews)

Analysis of suppliers’

executives’ questionnaire

data and testing hypotheses

H2, H3, H4

(Mann–Whitney U test)


109

the root causes of the given performance problems are presented in Appendix 1. A lack of

a qualified workforce is one of the root causes of performance problems, as 88% of

executives point out that attracting skilled employees is hard or very hard. Thus, keeping

qualified employees in the company is an important task for suppliers’ managers.

Employees’ dissatisfaction with work might increase voluntary labour turnover and cause

performance decline (McElroy and Morrow, 2001; Brown et al., 2009; Eady and Nicholls,

2011). Therefore, employees’ questionnaire data is analysed, and hypothesis H1 is tested

from the perspective of employees who replied that they would continue to work in their

current job (1st group, score 4 and 5 on Likert scale, n=449), employees who have doubts

about continuing work (2nd group, 3 on Likert scale, n=130), and those who will not

continue to work (3rd group, 1-2 on Likert scale, n=15). The results are presented in Table

1.

Table 1

Work continuance/discontinuance correlation with other factors (n=594)

No. Factor Pearson’s

𝓧2

p-

value

1st

group

mean,

(SD)

2nd

group

mean,

(SD)

3rd

group

mean,

(SD)

H1a Satisfaction with the current

shift work 80.4 <.001

3.8

(0.7)

3.3

(0.9)

2.8

(1.1)

H1b Evaluation of employees’

professional skills 38.8 <.001

3.6

(1.3)

3.2

(1.6)

2.2

(1.4)

H1c The salary corresponds with

the work responsibilities 96.7 <.001

3.2

(0.8)

2.6

(0.8)

2.1

(1.2)

H1d Complication of the work

requirements 25.2 .001

3.2

(0.9)

3.5

(0.8)

3.7

(1.1)

H1e

Training to improve

employees’ professional

skills

25.5 .001 3.8

(0.8)

3.4

(1.0)

3.2

(1.0)

H1f

Direct manager’s

knowledge about the skills

needed for employees

18.8 .016 4.0

(0.8)

3.8

(0.8)

3.3

(1.2)

H1g Easy to find another job 14.5 .070 3.5

(0.9)

3.6

(0.8)

3.7

(1.0)

H1h Confidence in professional

skills 11.2 .081

3.7

(0.7)

3.7

(0.7)

4.0

(0.8)

H1i

Premium on salary for

productivity (nominal data,

Yes or No)

4.5 .105 1.7

(0.4)

1.8

(0.4)

1.7

(0.5)

H1j Desire to improve

professional skills 13.1 .110

3.9

(0.8)

3.8

(0.9)

3.5

(1.2)

H1k

Premium on salary for the

quality of the work

(nominal data, Yes or No)

2.5 .281 1.8

(0.4)

1.8

(0.4)

1.7

(0.5)


110

H1l High discipline at the

current workplace 3.1 .790

4.3

(0.6)

4.3

(0.6)

4.4

(0.6)

Test for a difference among groups Kruskal-

Wallis H

p-

value

1st

group

mean,

(SD)

2nd

group

mean,

(SD)

3rd

group

mean,

(SD)

Grouping

variable

To what extent do you want

to continue working in your

current job?

395.2 <.001 4.3

(0.5)

3.0

(0.0)

1.7

(0.5)


The factors that significantly influence voluntary labour turnover comprise employees’

dissatisfaction with shift work and salaries that do not correspond with work

responsibilities along with suppliers’ disregard of the evaluation of employees’ skills,

complicated work requirements, lack of training for employees, and the direct manager’s

insufficient knowledge about the skills needed for employees (hypothesis H1a, b, c, d, e, f parts

are accepted). This might lead to the leakage of skilled employees from suppliers, causing

a supplier’s performance decline. As seen in H1h (Table 1), confidence in professional

skills of employees who will not continue to work is even higher than for those who will

continue to work. Moreover, employees who plan to leave their current work are younger,

yet at the same time experienced in the forest sector, and have worked for a long time at

their current company, 9 and 4 years, respectively (see Appendix 2). High demand for a

workforce, which facilitates finding another job, does not have a significant influence on

voluntary labour turnover (hypothesis H1g part is rejected). However, p-value 0.07

indicates the trend that in a situation where it is easy to find another job, employees could

leave the forest sector, causing workforce ageing problems, since those who plan to leave

are younger. Furthermore, employees’ confidence in their professional skills, desire to

improve skills, and bonuses for the productivity and quality of the work do not

significantly influence voluntary labour turnover. Moreover, high discipline at work does

not cause employee willingness to leave their current job (hypothesis H1h, I, j, k, l parts are

rejected).

To identify the root cause of performance problems related to the supplier’s management

and limited contract term, data from an executive questionnaire is analysed. Suppliers are

divided into two groups according to performance data: 1 – the best suppliers (n=11), who

meet both quality and labour productivity objectives set by the buyer, and 2 – the rest of

the suppliers (n=48), who do not meet the objectives completely. The difference between

the two groups of suppliers is analysed, and the results are presented in Table 2.


111

Table 2

Suppliers’ performance-influencing factors by management and limited contract

term

No. Factor Type of

supplier

Mean

rank U p-value

Type of

supplier

mean, (SD)

H2a

Knowledge in the development

of a motivating remuneration

system

1 31.8

244.0 .642

4.0 (0.4)

2 29.6 3.9 (0.6)

H2b Knowledge in the management

of skills for employees

1 28.7 250.0 .745

3.9 (0.5)

2 30.3 4.0 (0.7)

H2c Knowledge in the company’s

financial management

1 28.8 250.5 .766

3.9 (0.7)

2 30.3 4.0 (0.7)

H2d Knowledge in the management

of a company’s efficiency

1 32.2 240.0 .587

4.1 (0.7)

2 29.5 4.0 (0.6)

H2e Knowledge in quality

management

1 32.4 237.5 .559

4.1 (0.8)

2 29.5 3.9 (0.7)

H3 Easy to attract professional

employees

1 25.3 212.5 .271

1.5 (0.5)

2 31.1 1.8 (0.8)

H4a

Suppliers would increase their

efforts for efficiency

enhancement

1 24.1

199.0 .163

3.8 (1.3)

2 31.4 4.4 (0.7)

H4b Suppliers would increase their

efforts for quality improvement

1 26.4 224.0 .396

4.0 (1.2)

2 30.8 4.3 (0.8)

H4c

Suppliers would provide more

proposals for cooperation

improvement

1 30.3

260.5 .942

4.0 (1.3)

2 29.9 4.2 (0.8)

H4d Suppliers would invest more in

workforce development

1 25.0 209.0 .236

4.0 (1.2)

2 31.2 4.4 (0.8)

H4e Suppliers would invest more in

technological development

1 25.0 209.0 .219

4.1 (1.2)

2 31.2 4.5 (0.7)

Control Experience of a supplier in the

forest sector

1 31.7 245.5 .708

17.5 (6.6)

2 29.6 16.9 (5.6)


Both groups of suppliers have similar experiences in the forest sector. There is no

significant difference between the two groups of suppliers regarding the executives’ self-

appraisal of knowledge in management functions and their ability to attract professional

employees (hypotheses H2 and H3 are rejected). However, the capability of their companies

to achieve performance objectives in the same supply chain are different. Profit per

employee for the first supplier group exceeds the second group by 318% (data from

Lursoft database, 2017), and within the five-year period suppliers of the first group

increased their share in the buyer’s production volume by 3% annually (data from JSC

Latvia’s State Forests, 2017). Meanwhile, there is no significant difference between high


112

and low-performing supplier groups, i.e., a limited contract duration does not undermine

low-performance suppliers’ efforts to improve efficiency and quality, provide more

proposals for cooperation improvement, and invest more in the workforce and

technological development (hypothesis H4 is rejected).

DISCUSSION

In this study, factors that might influence the performance of SMEs which provide

production services for the buying company are analysed. The RCA concept is applied to

determine factors that might influence a supplier’s performance regarding their capability

to achieve labour productivity and quality objectives set by the buying company. In the

existing literature, it has been found that voluntary labour turnover might negatively

influence the performance of a company (McElroy and Morrow, 2001; Brown et al., 2009;

Eady and Nicholls, 2011). First, it has been found that employees’ dissatisfaction with shift

work and salaries that do not correspond to work responsibilities along with suppliers’

disregard of the evaluation of employees’ skills, complicated work requirements, lack of

training for employees, and the direct manager’s insufficient knowledge about the skills

needed for employees are the factors that significantly influence voluntary labour turnover

and might lead to the leakage of skilled employees from suppliers, causing performance

decline. Thus, the findings of this study contribute to the literature regarding voluntary

labour turnover, supplementing the factors that might cause it. However, the finding that a

lack of training for employees might lead to their departure contradicts the previous study

by Haines et al. (2010), where it is argued that training employees might increase the

voluntary labour turnover rate. The contradictory findings might arise from the different

scope and context of the studies. The study by Haines et al. (2010) includes various

industries, while this study is focused on one industry. Since entrepreneurship development

tends to be dynamic and requires continuous reassessment (Sauka and Chepurenko, 2017),

different voluntary labour turnover-influencing factors might be found in different

countries and enterprise settings.

Second, it has been found that an executive’s self-appraisal of management knowledge and

the ability to attract professional employees is similar for both high and low-performing

suppliers. Although executives’ knowledge in management is similarly assessed, the

capability of their companies to achieve performance objectives is different. Moreover,

low-performing suppliers are more confident in their ability to attract professional

employees, in the management of skills for employees, and in financial management. This

raises the question of how an executive’s high self-esteem regarding management

knowledge influences the performance of a company. The answer to this question might be

explained by the Dunning-Kruger effect. It is argued that unskilled people tend to

overestimate their abilities; they have little awareness of their incompetence or lack of

expertise (Kruger and Dunning, 1999; Dunning, 2011). Thus, executives of poorly


113

performing suppliers may have insufficient knowledge in the management of their

companies, which limits the ability to improve the performance and competitiveness of the

company. A lack of expertise in management may negatively influence the performance of

the buying company (Parmigiani and Mitchell, 2005). Accordingly, the buying company

should be aware of their suppliers’ abilities and limitations (Lawson et al., 2014) and

decide to replace or develop the suppliers (Glock et al., 2017), providing knowledge-

sharing (Adams et al., 2012). However, a lack of management knowledge among supplier

managers was not directly proven in this study. This leaves an open question for further

research: Does an executive’s knowledge in management influence company performance,

and if so, how?

Third, it has been found that limiting the contract period by five years does not limit low-

performance supplier efforts to improve efficiency and quality, provide more proposals for

cooperation improvement, and invest more in workforce and technological development.

However, the mean values of supplier executives’ answers indicate the importance of

contract duration. The mean value of high-performing supplier executives’ answers to all

questions regarding limited contract term influence is 3.98 out of 5 or 80%, while low-

performing suppliers’ executives were assessed at the 87% level. There is a trend that low-

performing suppliers’ executives, more than high-performing competitors, consider

contract duration to be a limiting factor for greater effort to improve efficiency and quality

and invest more in the workforce and technological development. For the buying company,

this trend needs to be considered in cases where alternative suppliers are not available. In

this study, contracts of suppliers are limited to a five-year collaboration period. To obtain

the next contract, a supplier has to participate in the buyer’s open tender and compete with

other suppliers. All suppliers have equal opportunities to obtain a contract. The buyer does

not offer any advantages to suppliers whose performance in the fulfilment of the previous

contract was higher than the others. Thus, this is a proper environment to test the influence

of limited contract duration. However, such an environment excludes supplier

development enhancement by dynamically extending the contract (Worthmann et al.,

2016). Nevertheless, further research could investigate how a shorter contract duration, up

to five years, might influence supplier efforts to improve buyer-relevant performance; it

could also look into what factors are influenced by a short-term contract duration, since we

know that without the assurance of a long-term contract, a supplier is unlikely to make

investments that would reduce cost for one particular buyer (Terpend and Krause, 2015).

CONCLUSIONS

1. This study has tried to determine performance-influencing factors that might cause

performance problems for supplier SMEs. In carrying out RCA, factors that might

affect performance were defined and grouped into three groups: (1) workforce

factors, (2) managerial factors, (3) contract-term factors.


114

2. Workforce factors include lower-tier factors that might influence the leakage of

skilled employees from suppliers, causing a performance decline. According to the

literature, voluntary labour turnover might negatively influence the performance of

a company (McElroy and Morrow, 2001; Brown et al., 2009; Eady and Nicholls,

2011). This study attempted to reveal the factors that cause voluntary labour

turnover. It was found that employees’ dissatisfaction with shift work and salaries

which do not correspond to work responsibilities, along with suppliers’ disregard

of the evaluation of employees’ skills, complicated work requirements, the lack of

training for employees, and the direct manager’s insufficient knowledge about the

skills needed for employees are the factors that significantly influence voluntary

labour turnover and might lead to the leakage of skilled employees from suppliers,

causing a performance decline.

3. Meanwhile, managerial factors include lower-tier factors related to an executive’s

knowledge in management functions and the capability to attract professional

employees. There is no significant difference between high and low-performing

supplier groups in terms of managerial knowledge and capability to attract

professional employees.

4. Finally, contract-term factors were related to the argument that a limited contract

period undermines suppliers’ efforts to improve buyer-related performance

(Terpend and Krause, 2015) and that supplier development might be enhanced by

dynamically extending the contract (Worthmann et al., 2016). This study shows

that there is no significant difference between high and low-performing supplier

groups in this regard, i.e., a limited contract duration does not undermine low-

performance suppliers’ efforts to improve performance.

LIMITATIONS

This study investigated performance-influencing factors of suppliers in the forest industry

of Latvia. In other industries or clusters of industries and those in other countries, similar

studies may reveal different or supplemental results because of a different context. Forest

industry companies included in this study mainly employ manual workers. Therefore,

factors influencing the voluntary labour turnover of knowledge workers (Drucker, 1959)

might differ from the factors for manual workers. Thus, further research could investigate

the difference in factors that influence voluntary labour turnover of knowledge and manual

workers.

In this study, a supplier executive’s knowledge in management was assessed by self-

appraisal questions. Due to the Dunning-Kruger effect (Kruger and Dunning, 1999;

Dunning, 2011), the influence of an executive’s management knowledge on the

performance of a company might be different using another knowledge assessment

method.


115

The influence of contract duration on supplier efforts to improve performance and invest in

development was studied in a supply chain where the buying company does not extend

contracts with suppliers dynamically, instead allowing them to compete for the next

contract, regardless of the performance in the fulfilment of the previous contract.

Therefore, the influence of contract duration might be different from cases where the

buying company extends contracts dynamically, thus enhancing the development of the

supplier (Worthmann et al., 2016).


116

Appendix 1

Suppliers’ performance problems, their root causes and verification questions

P1 – 52% of suppliers do not achieve labour productivity objectives set by the buyer.

P2 – 33% of suppliers do not achieve quality objectives set by the buyer.

Problem Root cause defined

by experts Hypothesis

Question for testing the

hypothesis Respondent

Factor

group

P1; P2 C1-Exhausting shift

work H1a

How satisfied are you with

the current shift work? Employee

Workforce

factors

P1; P2 C2-Non-evaluation

of employees’ skills H1b

How often does the

company you work for

evaluate your professional

skills?

Employee

P1; P2 C3-Non-motivating

pay H1c

To what extent does the

salary correspond with your

work responsibilities?

Employee

P1; P2 C4-Complicated

work requirements H1d

How complicated are the

requirements of the current

work?

Employee

P1; P2 C6-Non-training of

employees

H1e

How sufficient is the

training that the company

provides for you?

Employee

H1k

Assess your desire to

improve your professional

skills.

Employee

P1; P2

C7-Direct managers

lack knowledge

about the skills

needed for

employees

H1f

How good is your direct

manager’s knowledge

about the skills you need

for your profession?

Employee

P1; P2

C8-High demand

for a workforce in

competing sectors

H1g How easy would it be for

you to find another job? Employee

P1; P2 C9-Insufficient

skills for employees H1h

How do you personally

evaluate your professional

skills compared to the

average level in your

profession?

Employee

P1

C10-Employee pay

is not dependent on

productivity

H1i

Are you receiving a

premium on wages for

labour productivity?

(Yes/No)

Employee

P2

C11-Employee pay

is not dependent on

quality

H1j

Are you receiving a

premium on wages for the

quality of work? (Yes/No)

Employee

P1; P2

C12-High job-

enforcement

discipline

H1l How high is the discipline

in your current work? Employee

Continued on the next page


117

(continued)

P1; P2

C13-Low employee

motivation to work in

the current job

Grouping

variable

To what extent do you want

to continue working in your

current job?

Employee

P1; P2

C14-Managers lack

knowledge in the

development of a

motivating

remuneration system

H2a

Assess your knowledge in

the development of a

motivating remuneration

system.

Executive

Managerial

factors

P1; P2

C15-Managers have

no skills management

knowledge

H2b


the management of skills for

employees.

Executive

P1; P2

C16-Managers lack

financial

management

knowledge

H2c Assess your knowledge in

financial management. Executive

P1

C17-Managers have

no efficiency

management

knowledge

H2d


the management of a

company’s efficiency.

Executive

P2

C18-Managers lack

quality management

knowledge

H2e Assess your knowledge in

quality management. Executive

P1; P2 C19-Lack of

qualified employees H3

How easy is it for you to

attract qualified employees? Executive

P1; P2

C20-Limited contract

period negatively

influences suppliers’

efforts

H4a

If a service contract was not

limited by a five-year period,

how much would it affect the

following efforts:

1)suppliers would increase

their efforts in efficiency

enhancement

Executive

Contract-

term

factors

H4b

2)suppliers would increase

their efforts in quality

improvement

Executive

H4c

3)suppliers would provide

more proposals for

cooperation improvement

Executive

H4d

4)suppliers would invest

more in workforce

development

Executive

H4e

5)suppliers would invest

more in technology

development

Executive

5-point scale answers, except for C10 and C11


118

Appendix 2

Mean values of suppliers’ employee age and work experience in the forest sector and

at the current company

Work

continuance/discontinua

nce

Age, years Work experience in

the forest sector, years Work experience at the

current company, years

Will not continue to work

34

(n=15)

(SD 7.2)

9

(n=15)

(SD 5.7)

4

(n=15)

(SD 2.6)

Doubts about continuing

work

41

(n=127)

(SD 10.1)

14

(n=127)

(SD 8.7)

6

(n=125)

(SD 5.5)

Will continue to work

41

(n=447)

(SD 10.2)

13

(n=446)

(SD 8.5)

6

(n=445)

(SD 4.9)


119

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124

Authors

Dr Sandis Babris

BA School of Business and Finance, Riga, Latvia

Assistant professor at BA School of Business and Finance, plant director at Brabantia

Latvia SIA, former guest lecturer and assistant professor at the University of Latvia,

former COO/CFO at Primekss Group.

E-mail: [email protected]

Janis Gercans


Doctoral student in business management, head of production quality at JSC Latvia’s State

Forests, guest lecturer at Latvia University of Life Sciences and Technologies.


Dr Ivars Godmanis

RISEBA University of Applied Sciences, Riga, Latvia

Assistant professor at RISEBA. Ivars Godmanis is a Latvian politician, from 2009-2013 a

member of the European Parliament. Godmanis was the first Prime Minister of Latvia after

the restoration of Latvian independence (from 1990 until 1993) as well as from 2007 until

2009. In 1995 Godmanis was awarded the Order of the Three Stars and later appointed as

the Finance Minister and the Minister of the Interior in 2006. Godmanis is also known as

the president of JSC “Latvijas Krājbanka” and vice president of JSC “SWH Riga”. His

main research interests are international banking and the financial market.


Linda Jekabsone


Master’s student. Professional bachelor’s degree in electrical engineering sciences from

Riga Technical University, Latvia. Currently studying towards the Master’s Degree in

mailto:[email protected]




125

Cyber Security Management at BA School of Business and Finance in Riga, Latvia.

Professional work has been linked to the ICT field for more than 9 years.


Zita Lavrinovica


Master’s student. Bachelor’s Degree in Air Traffic Management. ISACA member since

2019. In the future, possible affiliation with the education field. Six years of experience as

a physical security specialist in the National Armed Forces of the Republic of Latvia. In

2020, she got involved in the education project “Mission Possible”, with the aim to

develop methodological materials for popularizing and teaching the subject of

cybersecurity in Latvian schools.


Dr Barbara Mazur (ORCID ID 0000-0003-2527-2603)

Lublin University of Technology, Poland

Professor, researcher at the Lublin University of Technology specializing in cultural

aspects of management, corporate social responsibility and international business. Author

and co-author of over 160 original research works, including five scientific monographs

published in Polish and English. Member of the Praxeology Scientific Society and three

international organizations: The European Business Ethics Network (EBEN), the

Consumer Citizenship Network (CCN) and the Partnership for Education and Research

about Responsible Living (PERL).


Marta Mazur-Malek (ORCID ID 0000-0001-8546-4004)

Graduated from the Warsaw School of Economics, Poland

Marta is obtaining a Bachelor’s Degree in Management and Entrepreneurship. She has

studied American culture in Poland and Germany, spa and wellness service design and

management in Estonia and enterprise managementin Poland. Her academic interests are

corporate wellness, wellbeing management and process management.





126

Elina Saba


Master’s student. Bachelor’s degree in communication science from Riga Stradins

University. After working in client support for the private sector for over 10 years, she

currently works for the public sector as a defence capability project manager’s assistant.

Her research interests lie in the field of cyber security, social engineering and trends in the

development of communication.


Maris Saba


Master’s student. Bachelor of Science in Economics and Arabic from the United States

Military Academy at West Point, New York. Maris currently focuses on cybersecurity

management and its relation to state defence and military strategy.


Muhammad Umer Shahid (ORCID ID 0000-0003-1084-9967)


International doctoral student from Germany. Umer worked for 3 years as a lecturer at the

University of Wah, Pakistan, and taught various management courses (HR,

Entrepreneurship, OB, SCM). In doctoral studies, his research interest is in entrepreneurial

networking and its various outcomes under varying institutional (formal & informal)

contexts. Currently, Umer is working with big data sets (Global Entrepreneurship Monitor,

World Bank, World Value Survey, Index of Economic Freedom) and using multilevel

modelling techniques for his research.


Jekaterina Sneidere

RISEBA University of Applied Sciences, Latvia

Jekaterina Sneidere, Ms.oec.sc., has worked in the banking industry since 2001, holding

various positions in areas such as investment banking, compliance, and finance.







127

Dr Tatjana Volkova (ORCID ID 0000-0002-7599-8720)


Professor of Strategic Management and Innovation Management. Research interests:

innovation management, strategic management, cybersecurity governance. Her research

findings have been published in a number of peer-reviewed books and journals nationally

and internationally and presented at numerous international conferences.




128

Editorial Affiliation Details

Dr Prof Tatjana Vasiljeva, Head of the Editorial Board (ORCID ID 0000-0002-6410-

2239)

Latvia, RISEBA University of Applied Sciences, Meza Street 3, Riga, LV-1048, phone:

+371 67500265, www.riseba.lv

Dr Assoc Prof Bella Butler, Editor (ORCID ID 0000-0002-5790-1745)

Australia, Curtin University, Kent Street, Bentley, Perth, Western Australia 6102, phone:

+61 892669266, www.curtin.edu.au

Dr Prof Andrejs Cirjevskis, Editor (ORCID ID 0000-0002-0754-9712)


+371 67500265, www.riseba.lv

Dr Prof Irina Sennikova, Editor (ORCID ID 0000-0001-6005-3946)


+371 67500265, www.riseba.lv

Dr Prof Tatjana Volkova, Editor (ORCID ID 0000-0002-7599-8720)

Latvia, BA School of Business and Finance, K. Valdemara Street 161, Riga, LV-1013,

phone: +371 67360133, www.ba.lv

Dr Prof Drahomira Pavelkova, Editor (ORCID ID 0000-0003-1399-6129)

Czech Republic, Tomas Bata University, nám. T. G. Masaryka 5555, 760 01 Zlín, phone:

+420 576038120, www.utb.cz

http://www.riseba.lv/

http://www.curtin.edu.au/



http://www.ba.lv/

http://www.utb.cz/


129

Dr Prof emeritus Tonis Mets, Editor (ORCID ID 0000-0003-3972-5204)

Estonia, University of Tartu, Ülikooli 18, 50090 Tartu, phone: +372 7375100,

www.ut.ee/et

Dr Prof Ole Gjolberg, Editor (ORCID ID 0000-0001-7175-8300)

Norway, University of Life Sciences, Universitetstunet 3, 1430 As, phone: +47 67230000,

www.nmbu.no

Dr Daiga Kamerade-Hanta, Editor (ORCID ID 0000-0003-2019-3391)

United Kingdom, University of Birmingham, Birmingham B15 2TT, phone:

+44(0)1214143344, www.birmingham.ac.uk

Dr Inna Kozlinska, Editor (ORCID 0000-0003-3341-3138)

The Netherlands, University of Groningen, address: PO Box 72, 9700 AB Groningen,

phone: +31 50 363 9111, www.rug.nl

Dr Virginijus Kundrotas, Editor (ORCID ID 0000-0002-9549-4546)

USA, Adizes Graduate School, address: 1212 Mark Avenue, Carpinteria, Santa Barbara

County, California, 93013, phone: +805 566 0742, www.adizes.com

Dr Prof Ulla Hytti, Editor (ORCID ID 0000-0003-1129-4473)

Finland, University of Turku, FI-20014 Turun yliopisto, phone: +358 294505000,

www.utu.fi

Dr Prof Sean Patrick Sassmannshausen, Editor (ORCID ID 0000-0001-8265-2413)

Germany, Regensburg University of Applied Sciences, Pruefeninger Str. 58, 93049

Regensburg, phone: +49(0)94194302, www.oth-regensburg.de

http://www.ut.ee/et

http://www.nmbu.no/

http://www.birmingham.ac.uk/

http://www.adizes.com/

http://www.utu.fi/

http://www.oth-regensburg.de/


130

Dr Prof Arnis Sauka, Editor (ORCID ID 0000-0002-7708-4375)

Latvia, Stockholm School of Economics in Riga, Strelnieku Street 4A, Riga, LV-1010,

phone: +371 67015800, www.sseriga.edu

Dr Prof Maryna Z. Solesvik, Editor (ORCID ID 0000-0002-6702-4643)

Norway, Western Norway University of Applied Sciences, Inndalsveien 28, 5063 Bergen,

Norway, phone: +47 55585800, www.hvl.no

http://www.sseriga.edu/

http://www.hvl.no/


131

Journal of Business Management, ISSN 1691-5348, Volume 19, 2021

is jointly published by

RISEBA University of Applied Sciences

Address: Meza Street 3, Riga, LV-1048, Latvia

Telephone: +371 67500265


BA School of Business and Finance

Address: K. Valdemara Street 161, Riga, LV-1013, Latvia

Telephone: +371 67360133




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JOURNAL OF BUSINESS MANAGEMENT VOLUME 19